> and having the government take on additional interest-bearing debt instead does not seem particularly attractive when the Chinese are the ones who will end up collecting interest on the loan.

But the Chinese aren't the ones that will end up collecting interest on additional US debt; while they are the biggest current foreign holder of US debt, their total holdings are dropping; they not only aren't the biggest purchaser of new US debt, they aren't even a net purchaser of US debt. (And they are only the biggest foreign holder, most US federal debt is owed to...entities within the US; non-federal US entities hold 4 times as much US debt as China does.)