Abstract
The traditional view is that China uses the foreign exchange income earned from the trade surplus to purchase U.S. treasury bonds, which provides financing for U.S. government expenditures and maintains the sustainability of U.S. public debt. Based on the modern monetary theory, this paper analyzes this phenomenon and believes that China’s trade surplus cannot finance US government expenditures. U.S. debt issuance can exert interest rate stabilization effect, exchange rate stabilization effect, currency issuance effect and innovation “crowding-out” effect, but it has no financing effect. Therefore, this paper puts forward some policy suggestions, such as increasing the central government expenditure and the issuance of treasury bonds, and implementing the reform of floating exchange rate system, in order to increase the monetary sovereignty of our country and give full play to the government’s role in promoting domestic economic innovation.
Highlights
In recent years, with the continuous increase of China's trade surplus, China's holdings of U.S treasury bonds have been growing
The traditional view is that China will trade surplus accumulated foreign exchange income to buy U.S treasury bonds to finance U.S fiscal expenditures, which indirectly maintains the sustainability of U.S public debt
China's purchase of U.S government bonds from the foreign exchange income earned from the trade surplus will certainly finance U.S government expenditures
Summary
With the continuous increase of China's trade surplus, China's holdings of U.S treasury bonds have been growing. The traditional view is that China will trade surplus accumulated foreign exchange income to buy U.S treasury bonds to finance U.S fiscal expenditures, which indirectly maintains the sustainability of U.S public debt.
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