Many people believe that China is America’s banker, and that it can refuse to buy American debt any time and dump the US public debt that it has already bought. The first part of that claim is wrong. The second part of that claim is technically correct, but irrelevant, because China cannot blackmail the US.
It would actually be beneficial for the US (yes, for the US) if China dumped America’s debt. Why? Because America’s allies would then start buying it. And it would be better if America’s debt was owned by its allies, not its principal enemy. Gordon Chang, an expert on Chinese affairs, has explained this fact:
“For the same reason, the Chinese cannot dump our debt, as a Chinese general suggested in February as a means of punishing us for arms sales to Taiwan. In any event, the tactic, which the Chinese call the “nuclear option,” will not work.
If the Chinese sell our debt, they will still get back dollars. If they are doing this to hurt us, they will exchange their dollars for other currencies. As a practical matter, they will be converting their dollars into euros, pounds, and yen.
Those purchases will send the value of those currencies soaring, which means Brussels, London, and Tokyo will go out into the market to rebalance their currencies, and the only way they can do that is to buy… dollars. The result? Our debt will be held by our friends instead of a potential adversary. If debt is a weapon, then dumping it is unilateral disarmament.
So the Chinese government has bought and will continue to buy our debt. There were reports that Beijing sold $34.2 billion of U.S. Treasury securities in December from publicly tracked accounts, undoubtedly sending us a warning. But at about the same time, the Chinese were buying Treasuries through foreign nominees—that is, secretly. We should of course be concerned about the estimated $1.7 trillion of our government’s debt that China owns, but this holding is not a sword over our heads.
The Chinese, struggling to keep their economy moving forward, are more dependent on us than we are on them. And that means what everyone knows about China—that Beijing holds all the cards—is just a myth. That’s why Hu Jintao is in Washington at this moment.” (http://www.thedailybeast.com/blogs-and-stories/2010-04-11/chinas-reign-ends-tomorrow/2/)