Why would the government of China...?

Question

Why would the government of China continue to lend money (by buying US Treasury securities) at a low interest rate, while at the same time borrowing money (in the form of issuing its own government securities) at a much higher interest rate? How is this likely to play out? If China cashed in a portion of its US bonds, what effect would this have on the stock market and on interest rates?

Answer 1

That is normal. Regardless of current accounts deficits, I would say every country buys bonds and at the same time issues debt. Because there are various parts of the government or companies that are independent. For example an airport authority in china might issue bonds to build a new airport, as they do not have the cash and that financial structure makes the most sense.
If China stopped buying US bonds, US interest rates would rise. But if they did they would have to put the money somewhere, and it most likely would end up "re-routed" to US bonds. Money is fungible.