It does, but then China can't use their debt holding as a weapon. China is incentivized to keep the dollar stable relative to the yuan, because crashing the dollar would hurt China a lot, and propping up the dollar also would. The whole debt holding is a lot more of a rent-seeking arrangement. Both the debtor and debtee are better off keeping the status quo. Plus China doesn't exactly have the capital to do anything about it. Their own economy is in a debt spiral only kept from crashing by huge government intervention and very tight forex capital controls.
I’m not sure I’d call it ‘rent seeking’. China needs forex reserves like a lot of countries and China is big so it’s reserves are big. It’s just that it is generally more convenient but basically equivalent to hold treasuries instead of dollars if you have an enormous amount of money. Doesn’t eg Japan also hold a bunch of treasuries for similar reasons?
I'm no expert on this topic. My perspective is simply that it's against a debt holder's interest to have the debt's underlying asset (currency) devalued. It's much better if the debt holder gets their interest payments (the "rent seeking" part) against an asset that has a stable equivalent monetary value (in term of purchasing power). Especially when we talk of currency, since the interest payment is made... in the currency that would be devalued. Basically, China is long on the USD.
