According to China Daily, China owns $1.13 trillion of US debt. China has $3.20 trillion in foreign exchange reserves.
via Chart of the day: China’s U.S. Debt Holdings | Credit Writedowns.
The key statistic here is the $36.5 billion decline in August which dwarfs previous monthly changes. No wonder the yuan jumped against the dollar.
But ask yourself: why has a poor country like China (GDP per capita of $4000 a year) invested more than $1T in US Treasuries? It could not be for the yield. Inflows on the US capital account are used by China to suppress its currency and give its exporters a massive trade advantage against US manufacturers. Imposing punitive tariffs on Chinese imports would provoke a tit-for-tat response and lead to a trade war. But a US withholding tax on foreign capital inflows could not provoke retaliation as China already strictly controls capital inflows. And exemptions to the withholding tax — only to countries who have reciprocal open capital markets — could be negotiated on a country-by-country basis as an extension of existing tax treaties.
That would force currency manipulators to repatriate their investments in US capital markets. This should be welcomed by the US as it would suppress the dollar against the yuan and other currencies, giving US manufacturers a massive advantage in export markets.