Is it a Risk for America that China Holds So Much U.S. Debt? | ChinaPower Project (2024)

Many worry that China’s ownership of American debt affords the Chinese economic leverage over the United States. This apprehension, however, stems from a misunderstanding of sovereign debt and of how states derive power from their economic relations. The purchasing of sovereign debt by foreign countries is a normal transaction that helps maintain openness in the global economy. Consequently, China’s stake in America’s debt has more of a binding than dividing effect on bilateral relations between the two countries.

Even if China wished to “call in” its loans, the use of credit as a coercive measure is complicated and often heavily constrained. A creditor can only dictate terms for the debtor country if that debtor has no other options. In the case of the United States, American debt is a widely-held and extremely desirable asset in the global economy. Whatever debt China does sell is simply purchased by other countries. For instance, in August 2015 China reduced its holdings of U.S. Treasuries by approximately $180 billion. Despite the scale, this selloff did not significantly affect the U.S. economy, thereby limiting the impact that such an action may have on U.S. decision-making.

Furthermore, China needs to maintain significant reserves of U.S. debt to manage the exchange rate of the renminbi. Were China to suddenly unload its reserve holdings, its currency’s exchange rate would rise, making Chinese exports more expensive in foreign markets. As such, China’s holdings of American debt do not provide China with undue economic influence over the United States.

Why do countries accumulate foreign exchange reserves?

Any country that trades openly with other countries is likely to buy foreign sovereign debt. In terms of economic policy, a country can have any two but not three of the following: a fixed exchange rate, an independent monetary policy, and free capital flows. Foreign sovereign debt provide countries with a means to pursue their economic objectives.

The first two functions are monetary policy choices performed by a country’s central bank. First, sovereign debt frequently comprises part of other countries’ foreign exchange reserves. Second, central banks buy sovereign debt as part of monetary policy to maintain the exchange rate or forestall economic instability. Third, as a low-risk store of value, sovereign debt is attractive to central banks and other financial actors alike. Each of these functions will be discussed briefly.

Foreign Reserves

Any country open to international trade or investment requires a certain amount of foreign currency on hand to pay for foreign goods or investments abroad. As a result, many countries keep foreign currency in reserve to pay for these expenses, which cushion the economy from sudden changes in international investment. Domestic economic policies often require central banks to maintain a reserve adequacy ratio of foreign exchange and other reserves forshort-term external debt, and to ensure a country’s ability to service its external short-term debt in a crisis. The International Monetary Fund publishes guidelines to assist governments in calculating appropriate levels of foreign exchange reserves given their economic conditions.

Exchange rate

A fixed or pegged exchange rate is a monetary policy decision. This decision attempts to minimize the price instability that accompanies volatile capital flows. Such conditions are especially apparent in emerging markets: Argentinian import price increases of up to 30 percent in 2013 led opposition leaders to describe wages as “water running through your fingers.” Since price volatility is economically and politically destabilizing, policymakers manage exchange rates to mitigate change. Internationally, few countries’ exchange rates are completely “floating,” or determined by currency markets. To manage domestic currency rates, a country might choose to purchase foreign assets and store them for the future, when the currency might depreciate too quickly.

A low-risk store of value

As sovereign debt is government-backed, private and public financial institutions view it as a low-risk asset with a high chance of repayment. Some government bonds are seen as riskier than others. A country’s external debt may be viewed as unsustainable relative to its GDP or its reserves, or a country could otherwise default on its debt. Generally, however, sovereign debt is more likely to return value and therefore is safer relative to other forms of investment, even if earned interest is not high.

Why does China buy U.S. debt?

China buys U.S. debt for the same reasons other countries buy U.S. debt, with two caveats. The crippling 1997 Asian Financial Crisis prompted Asian economies, including China, to build up foreign exchange reserves as a safety net. More specifically, China holds large exchange reserves, which were built up over time due in part to persistent surpluses in the current account, to inhibit cash inflows from trade and investment from destabilizing the domestic economy.

China’s large U.S. Treasury holdings say as much about U.S. power in the global economy as any particularity of the Chinese economy. Broadly speaking, U.S. debt is an in-demand asset. It is safe and convenient. As the world’s reserve currency, the U.S. dollar is extensively used in international transactions. Trade goods are priced in dollars and due to its high demand, the dollar can easily be cashed in. Furthermore, the U.S. government has never defaulted on its debt.

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Despite U.S. debt’s attractive qualities, continued U.S. debt financing has concerned economists, who worry that a sudden stop in capital flows to the United States could spark a domestic crisis.1 Thus, U.S. reliance on debt financing would present challenges—not if demand from China were halted, but if demand from all financial actors suddenly halted.2

From a regional perspective, Asian countries hold an unusually large amount of U.S. debt in response to the 1997 Asian Financial Crisis. During the Asian Financial Crisis, Indonesia, Korea, Malaysia, the Philippines, and Thailand saw incoming investments crash to an estimated -$12.1 billion from $93 billion, or 11 percent of their combined pre-crisis GDP.3 In response, China, Japan, Korea, and Southeast Asian nations maintain large precautionary rainy-day funds of foreign exchange reserves, which—for safety and convenience—include U.S. debt. These policies were vindicated post-2008, when Asian economies boasted a relatively speedy recovery.

From a national perspective, China buys U.S. debt due to its complex financial system. The central bank must purchase U.S. Treasuries and other foreign assets to keep cash inflows from causing inflation. In the case of China, this phenomenon is unusual. A country like China, which saves more than it invests domestically, is typically an international lender.4

To avoid inflation, the Chinese central bank removes this incoming foreign currency by purchasing foreign assets—including U.S. Treasury bonds—in a process called “sterilization.” This system has the disadvantage of generating unnecessarily low returns on investment: by relying on FDI, Chinese firms borrow from abroad at high interest rates, while China continues to lend to foreign entities at low interest rates.5 This system also compels China to purchase foreign assets, including safe, convenient U.S. debt.

Who owns the most U.S. debt?

Around 70 percent of U.S. debt is held by domestic financial actors and institutions in the United States. U.S. Treasuries represent a convenient, liquid, low-risk store of value. These qualities make it attractive to diverse financial actors, from central banks looking to hold money in reserve to private investors seeking a low-risk asset in a portfolio.

Of all U.S. domestic public actors, intragovernmental holdings, including Social Security, hold over a third of U.S. Treasury securities.The secretary of the treasury is legally required to invest Social Security tax revenues in U.S.-issued or guaranteed securities, stored in trust funds managed by the Treasury Department.

The Federal Reserve holds the second-largest share of U.S. Treasuries, about 13percent of total U.S. Treasury bills. Why would a country buy its own debt? As the U.S. central bank, the Federal Reserve must adjust the amount of money in circulation to suit the economic environment. The central bank performs this function via open market operations—buying and selling financial assets, like Treasury bills, to add or remove money from the economy. By buying assets from banks, the Federal Reserve places new money in circulation in order to allow banks to lend more, spur business, and help economic recovery.

Excluding the Federal Reserve and Social Security, a number of other U.S. financial actors hold U.S. Treasury securities. These financial actors include state and local governments, mutual funds, insurance companies, public and private pensions, and U.S. banks. Generally speaking, they will hold U.S. Treasury securities as a low-risk asset.

The biggest effect of a broad scale dump of US Treasuries by China would be that China would actually export fewer goods to the United States.

- Scott Miller

Overall, foreign countries each make up a relatively small proportion of U.S. debt-holders. AlthoughChina’s holdings have represented just under20 percent of foreign-owned U.S. debt in the past several years, this percentage only comprises between 3 and 6 percent of total U.S. debt. China's holdings fell to $859 billion in January 2023, marking the lowest level since 2009. Moreover, Japan has at times overtaken China as the largest foreign holder of U.S. debt. This has been the case since June 2019, as China's holdings have fallen and Japan's have risen.

Internationally, this situation is common: most sovereign debt is held domestically. European financial institutions hold the majority of European sovereign bonds. Similarly, Japanese domestic financial actors hold approximately 90 percent of Japanese net sovereign debt. Thus despite international demand for U.S. sovereign debt, the United States is no exception to the global trend: U.S. domestic actors hold the majority of U.S. sovereign bonds. Is it a Risk for America that China Holds So Much U.S. Debt? | ChinaPower Project (1)

Is it a Risk for America that China Holds So Much U.S. Debt? | ChinaPower Project (2024)


Is it a Risk for America that China Holds So Much U.S. Debt? | ChinaPower Project? ›

Many worry that China's ownership of American debt affords the Chinese economic leverage over the United States. This apprehension, however, stems from a misunderstanding of sovereign debt and of how states derive power from their economic relations.

What happens if China sells US debt? ›

It's going to put it into bonds of other countries. It will have to buy other currencies in order to invest in those countries' bonds. So US interest rates will no doubt rise as the supply of US Treasury bonds suddenly increases and the dollar will fall as China moves a lot of money out of dollars.

Is China an economic threat to the United States? ›

The counterintelligence and economic espionage efforts emanating from the government of China and the Chinese Communist Party are a grave threat to the economic well-being and democratic values of the United States. Confronting this threat is the FBI's top counterintelligence priority.

Why is China dumping US treasuries? ›

Selling Treasurys is a fast way to whip up U.S. dollars, and China will sometimes use extra dollars to go out on the global market and buy up their own currency. That artificially pumps up its value. It's like planting someone at an auction to drive up your prices.

Who owes the US the most money? ›

Among other countries, Japan and China have continued to be the top owners of US debt during the last two decades. Since the dollar is a strong currency that is accepted globally, holding a substantial amount of US debt can be beneficial.

Is China's debt worse than the US? ›

China's debt overhang far exceeds the burdens facing the United States. As recently as 2020, total debt in the United States relative to GDP exceeded China's. But as of mid-2022, China's relative debt burden stood 40 percent higher than America's.

What country owns most of the United States? ›

Which countries own the most land in the U.S.?
  • CANADA. 31%
  • Other. 28%
  • ITALY. 7%
  • GERMANY. 6%
  • PORTUGAL. 3.6%
  • FRANCE. 3.2%
Mar 29, 2024

How much is the U.S. dependent on China? ›

U.S. goods and services trade with China totaled an estimated $758.4 billion in 2022. Exports were $195.5 billion; imports were $562.9 billion. The U.S. goods and services trade deficit with China was $367.4 billion in 2022.

Will China replace the U.S. as the largest economy in the world? ›

The U.S., China and India may take turns leading the global economy this century, according to an analysis from the Centre for Economics and Business Research. The CEBR forecast suggests China could potentially take the top spot as the world's largest economy by gross domestic product as early as 2037.

What is the problem between U.S. and China? ›

Since the normalization of relations in the 1970s, the US–China relationship has been marked by numerous perennial disputes including the political status of Taiwan, territorial disputes in the South China Sea, and more recently the treatment of Uyghurs in Xinjiang.

How much land does China own in the US? ›

China owns 384,000 acres of American agricultural land. That's a 30% increase just since 2019. And on top of that, they own land near an air force base in North Dakota.

Does Russia hold any US debt? ›

The value of U.S. Treasury securities held by residents of Russia amounted to 33 million U.S. dollars in June 2023, the lowest over the period under consideration. Furthermore, in March 2020, the figure decreased sharply to 3.85 billion U.S. dollars, down from 12.6 billion U.S. dollars one month prior.

How much does China owe the USA? ›

The United States pays interest on approximately $850 billion in debt held by the People's Republic of China. China, however, is currently in default on its sovereign debt held by American bondholders.

Which country has no debt? ›

1) Switzerland

Switzerland is a country that, in practically all economic and social metrics, is an example to follow. With a population of almost 9 million people, Switzerland has no natural resources of its own, no access to the sea, and virtually no public debt.

Why is the US in so much debt? ›

One of the main culprits is consistently overspending. When the federal government spends more than its budget, it creates a deficit. In the fiscal year of 2023, it spent about $381 billion more than it collected in revenues. To pay that deficit, the government borrows money.

What is one real concern about a large national debt? ›

A nation saddled with debt will have less to invest in its own future. Rising debt means fewer economic opportunities for Americans. Rising debt reduces business investment and slows economic growth.

What happens when countries stop buying US debt? ›

What happens if all countries stop buying US treasuries? If all countries stop buying US treasuries, it would have a significant impact on the US economy. The US government would have to find other buyers for its debt, which could lead to higher interest rates and lower long-term growth.

How much US debt is owed to China? ›

In total, other territories hold about $7.4 trillion in U.S. debt. Japan owns the most at $1.1 trillion, followed by China, with $859 billion, and the United Kingdom at $668 billion.

How much money does China owe the United States? ›

Every country should pay its sovereign debt. Default, we are told, is not an option. But has anyone told China? The United States pays interest on approximately $850 billion in debt held by the People's Republic of China.

How much of the US debt is owned by China? ›

Nearly half of all US foreign-owned debt comes from five countries. All values are adjusted to 2023 dollars. As of January 2023, the five countries owning the most US debt are Japan ($1.1 trillion), China ($859 billion), the United Kingdom ($668 billion), Belgium ($331 billion), and Luxembourg ($318 billion).

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