This Saturday the Washington Post reported:

Exerting its new influence as the U.S. government’s largest creditor, China yesterday demanded that the Obama administration “guarantee the safety” of its $1 trillion in American bonds as Washington goes further into debt to combat the economic crisis.

China surpassed Japan last year as the largest foreign holder of Treasury bonds. Any indication that it intends to cease those purchases — or, worse, stage a sell-off — could drive up the cost of borrowing for the U.S. government, as well as send mortgage rates higher for millions of Americans.

That reality, experts say, has given China more leverage in its dealings with Washington, with some seeing Wen’s comments yesterday as amounting to economic saber-rattling.

But as Heritage research fellow Derek Scissors shows, China’s creditor status does not make them nearly as powerful as they let on:

Buying our bonds doesn’t give the P.R.C. that much leverage over us because they lack viable alternatives—largely because so much money is involved.

Subtracting how much China paid for U.S. goods and services last year from what we paid them leaves the P.R.C. $266 billion ahead. The year before, they racked up $256 billion that way.

Now for the most important part of the discussion: China can’t spend the money at home. Beijing has set up a system whereby (1) money can’t flow freely in and out, and (2) China’s central bank—the People’s Bank—must buy dollars from whoever wants to sell. … The People’s Bank must, by law, buy all dollars it is offered. So nearly all dollars end up right back where they started. Nobody seems to quite believe this, especially inside China. Poor Yi Gang, People’s Bank deputy governor, has to repeat every month that reserves must “unavoidably” or “inevitably” be invested outside the P.R.C.

Now, “outside the P.R.C.” still seems to leave Beijing a lot of investment options. Here’s where the sheer amount of dollars comes in: It’s very hard to find places to invest all that money. For example, China already has bought more oil than it can store and there’s not enough gold available on the planet to buy with just a year’s worth of China’s trade surplus.

The only market open to the P.R.C. and big enough to absorb its dollars is our bond market. That’s why China has at least $1.1 trillion, and maybe as much as $1.7 trillion, already invested in American bonds. That’s why China moved $200 billion into U.S. Treasury bonds last year, even though the interest rate was dropping like a stone. Beijing knows it has no real choice, even if it’s very useful to pretend it is America which has no choice.