The Globalization of United States Debt: The Real Impact of China's Rise as a Creditor State

Abstract:In this Note, I seek to answer a simple question: By owning a large quantity of United States debt, can a foreign country influence United States policies at home or abroad? To answer, I apply scholarship in financial leverage theory to China—the largest foreign holder of U.S. debt. As a result, I find no plausible threat of China using financial leverage against the United States.Instead, I argue that the true impact of China's rise as a creditor state has been its ability to fundamentally undervalue its currency by investing in the sovereign debt of foreign nations. Such monetary policies run contrary to China's obligations with the International Monetary Fund and expose the need for a more effective international enforcement mechanism for intentional currency devaluations. While the World Trade Organization's Dispute Settlement Board may provide an alternative solution, I believe China's emergence as a trading power will insulate it from international punishment.In the end, I look to the market, or "global invisible hand" for solace. I argue that over the long term the global market will act as a regulator and will rein in China's currency policies as the country liberalizes its markets and begins to shift away from a traditional export-driven economy.