When China sells US treasuries, it affects both the exchange rate and US interest rates.
- Exchange rate: China receives dollars, buys yuan, which rises the price of yuan in dollars, an appreciation of the yuan or a depreciation of the dollar.
- US Interest rate: Selling treasuries represents a reduction in the supply of loans to the US, which increases the price of loans to the US, i.e. the US interest rate.
Source ZeroHedge
TRUTH IN BLOGGING: I am a micro-economist, so I am wrong about small things.
My take on this, professors
ReplyDelete1. On exchange rate, yes yuan will appreciate vs the dollar if China converts the US dollar proceeds into yuan
2. On interest rate, someone else is buying the treasuries from China, so there should be no change in supply of loans to US due to this. However, if yuan has been appreciating vs the USD, its trade surplus vs the US will go down, which if it leads to a slower Chinese economy, could lead to decreasing price of loans in China.