China has been keeping the value of its own currency down in order to support its exports to the US, and in the process it has been accumulating dollars (which

China has been keeping the value of its own currency down in order to support its exports to the US, and in the process it has been accumulating dollars (which then are invested in US debt). There is a big question if they will continue to do that. The US debt accumulation process runs like this. A Chinese exporter of electric goods (for example) has its revenues in US dollars but his costs are mostly in Yuan. As he receives money from his American customers, he sells dollars to buy local currency to pay his workers, to pay taxes etc. Without Chinese central bank intervention the collective activity of exporters would drive Yuan rate up vs dollar very quickly and that would make their exports less competitive. Chinese central bank wants to keep exports competitive, so it buys US dollars from the exporters at artificially high rates. Its 'foreign currency reserves' keep growing as long as there are exporters bringing in piles of export revenues in dollars. All these dollars needs to be bought up in order to keep Chinese exports competitive. And then all these bought dollars need to be invested, the US Treasuries being the natural place for it. This all works as long as US consumer is buying. But the US consumers have stopped buying like they used to for many years and some say forever. No major revenues are expected from exports to the US. No need to buy dollars for the Central Bank. In fact, the opposite is likely to happen. Chinese domestic consumption is growing fast. Very soon domestic Chinese market will become the biggest target for the world's exporters, just as US post-war consumer was. Chinese central bank may want to stimulate local consumption and capital inflows by switching to 'strong Yuan' policy, just like US did with its dollar. There will be no point of spporting the USD and holding dollar-denominated securities (US treasuries) for them. To summarize, Chinese investment in US treasuries is not a result of desire to find a 'safe heaven' for extra money. It is because they need to park all that greenbacks the accumulated during years of keeping the Yuan down. Today they do not need to support USD anymore. They have no reason to buy US debt either. Prepare for a nasty surprise.