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.
Holders of U.S. Debt
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.
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.
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.
A Conversation with Scott Miller
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- 0:12 – Can China use its creditor position as an instrument of power or leverage against the U.S?
- 2:09 – Why do countries buy each other’s debt?
- 3:40 – If China sells its U.S. Treasury Bonds, what would happen? How would the economies of both countries be affected?
- 5:43 – Would countries still eagerly buy US Treasury Bonds if the US dollar was no longer the world economy’s reserve currency?
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 5 and 7 percent of total U.S. debt. China’s holdings fell to $1.05 trillion in November 2016, marking the lowest level since 2010. 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.
What happens if China sells all U.S. debt? ›
If China (or any other nation having a trade surplus with the U.S.) stops buying U.S. Treasuries or even starts dumping its U.S. forex reserves, its trade surplus would become a trade deficit—something which no export-oriented economy would want, as they would be worse off as a result.How Much of U.S. debt is owned by China? ›
Foreign holders of United States treasury debt
Of the total 7.2 trillion held by foreign countries, Japan and Mainland China held the greatest portions, with China holding 870 billion U.S. dollars in U.S. securities.
China buys Treasuries to help depress the value of its currency, the yuan. A cheaper yuan makes the country's exports less expensive for foreign buyers. The Chinese economy would suffer as much as, if not more than, that of the United States if China were to suddenly stop buying U.S. debt.Could the US ever get out of debt? ›
In modern history, the U.S. has never defaulted on its debt. The debt ceiling is the self-imposed limit on how much debt Congress allows the federal government to have. If Congress does not raise or suspend the debt ceiling, the U.S. could default on its debt, which would also impact financial markets and the economy.Who owns most of U.S. debt? ›
1. Japan. Japan held $1.08 trillion in Treasury securities as of November 2022, beating out China as the largest foreign holder of U.S. debt.3 The low and negative yield market in Japan makes holding U.S. debt attractive.How much does Japan owe the US? ›
Debts and Debtors of the US Government.
|Country Name||Value of Holdings (Billions of $)|
This group is comprised of commercial banks, mutual funds, pension funds, state and local governments, and insurance companies. They typically are more rate sensitive than the Fed and foreign governments. Collectively US Financial Institutions is the largest of the three groups of buyers of Treasuries.Who does the US borrow money from? ›
The U.S. national debt is the sum of public debt that is held by other countries, the Federal Reserve, mutual funds, and other entities and individuals, as well as intragovernmental holdings held by Social Security, Military Retirement Fund, Medicare, and other retirement funds.How much in debt is Russia? ›
In the latest reports, Russia National Government Debt reached 327.9 USD bn in Jan 2023. The country's Nominal GDP reached 619.9 USD bn in Sep 2022.What would happen if a country defaults on its sovereign debt? ›
The immediate impact of sovereign default to creditors is the loss of the principal amount loaned to the government and the interest owed on the debt. The state may resort to either partial cancellation or decide to restructure the debt to more favorable terms.
Why does the US owe so much debt? ›
Tax cuts, stimulus programs, increased government spending, and decreased tax revenue caused by widespread unemployment generally account for sharp rises in the national debt.Which countries owe China money? ›
Those with the highest external debt to China are Pakistan $77.3 billion, Angola $36.3 billion, Ethiopia $7.9 billion, Kenya $7.4 billion and Sri Lanka $6.8 billion.Why can't the US pay off its debt? ›
Because the United States runs budget deficits — meaning it spends more than it brings in through taxes and other revenue — it must borrow huge sums of money to pay its bills. That includes funding for social safety net programs, interest on the national debt and salaries for troops.What happens if US debt gets too high? ›
But when the debt exceeds the tipping point, your standard of living could be impacted. Interest rates may increase and that could slow the economy. The stock market could react to a lack of investor confidence, which could mean lower returns on your investments. And a recession may even be possible.How much would each American have to pay to pay off the national debt? ›
The National Debt Clock says that “debt per citizen” is currently $87,124. But there's more, much more.Who owns over 70% of the U.S. debt? ›
The biggest owner is the Social Security Trust Fund. These Government Account Series securities have been running surpluses for years, and the federal government uses these surpluses to pay for other departments.Which country has highest debt? ›
United States. The United States boasts both the world's biggest national debt in terms of dollar amount and its largest economy, which resolves to a debt-to GDP ratio of approximately 128.13%.What is the highest the U.S. debt has ever been? ›
- The U.S. national debt grew to a record $31.42 trillion in by the end of 2022. ...
- During national threats, the U.S. increases military spending.
After World War II, the United States also understood the strategic importance of using foreign assistance and other tools to aid and rebuild post-war Japan. Between 1946 and 1952, Washington invested $2.2 billion — or $18 billion in real 21st-century dollars adjusted for inflation — in Japan's reconstruction effort.Which country is debt free? ›
The best example can be taken from Hong Kong (it is a one of the debt free countries), whose economy has the least debt to GDP ratio.
How much money does the US owe to itself? ›
Roughly $24.3 trillion of America's total public debt outstanding consists of debt held by the public, and $6.6 trillion is intragovernmental holdings, according to Monday data from the Treasury Department.Can China call in U.S. debt? ›
Key Takeaways. Whether you're an American retiree or a Chinese bank, American debt is considered a sound investment. The Chinese yuan, like the currencies of many nations, is tied to the U.S. dollar. Because of varying maturities dates, China would be unable to call in all its Treasury holdings at once.Is China in a debt crisis? ›
"No doubt, China's current debt crisis has the potential to exacerbate existing socio-economic tensions," Singleton said, adding that renewed public protests like those in late 2022 could emerge, as Chinese citizens come to terms with "vanishing jobs, closed businesses and reduced wages."Is the US bond market in trouble? ›
The bond market suffered a significant meltdown in 2022. Bonds are generally thought to be the boring, relatively safe part of an investment portfolio. They've historically been a shock absorber, helping buoy portfolios when stocks plunge. But that relationship broke down last year, and bonds were anything but boring.How much is owed to Social Security? ›
As of December 2022 (estimated), the intragovernmental debt was $6.18 trillion of the $31.4 trillion national debt. Of this $6.18 trillion, $2.7 trillion is an obligation to the Social Security Administration.How much debt can the US handle? ›
The debt limit caps the total amount of allowable outstanding U.S. federal debt. The U.S. hit that limit—$31.4 trillion—on January 19, 2023, but the Department of the Treasury has been undertaking a set of “extraordinary measures” so that the debt limit does not yet bind.How much is the United States worth? ›
United States - Federal Government; Net Worth (IMA), Level was -20997153.00000 Mil. of $ in July of 2022, according to the United States Federal Reserve.What happens if America defaults? ›
Economists say consequences of a default on the national debt could include higher interest rates, a stock market crash, a recession and massive job losses. NBC's Alice Barr reports. The U.S. officially hit the debt ceiling on Jan. 18, 2023.What is Mexico national debt? ›
Mexico National Government Debt reached 769.3 USD bn in Jan 2023, compared with 731.3 USD bn in the previous month.Which country has defaulted the most? ›
Spain holds the dubious record for defaults, as having done so six times, with the last occurrence in the 1870s.
Is sovereign debt risky? ›
Sovereign risk is the potential that a nation's government will default on its sovereign debt by failing to meet its interest or principal payments. Sovereign risk is typically low, but can cause losses for investors in bonds whose issuers are experiencing economic woes leading to a sovereign debt crisis.Can the US have a sovereign debt crisis? ›
The US monetary-fiscal regime is already skating on thin ice. Even if nothing else happened, the 125% debt in combination with the $2.6 trillion deficit and rising interest rates could lead to the same kind of sovereign debt crisis that happens in every country that faces those kinds of numbers.Who bears the burden of long term public debt? ›
The state generally pays the interest and principal debt amount from taxes; therefore, these debts are a burden on the society [10, 11, 12] (Figure 1).How will us pay off debt? ›
Raising taxes and cutting spending are two of the most popular solutions for reducing debt, but politicians may be hesitant to do both. Diverting spending from the military to other sectors may boost job growth, which could spur consumer spending and help the economy.Which country owes China the most? ›
- Middle East.
- South Asia.
The U.S. has been the largest economy in the world by GDP since the metric came into favor in the mid-1900s. But China has grown at a far greater pace in recent decades, with its GDP growing from just 12% of the U.S.' in 2000 to 77% last year.Who does Canada owe debt to? ›
Overall, about 76 per cent of Government of Canada market debt was held by Canadian investors, such as insurance companies and pension funds, and financial institutions and governments.Is it good for America to be in 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 are the dangers of the US debt? ›
High and rising deficits and debt can lead to persistently high inflation, rising interest rates, slower economic growth, increased interest payments, reduced fiscal space, greater geopolitical risk, and growing generational imbalances.Will US debt cause inflation? ›
If people come to believe that bonds held today will be paid off in the future by printing money rather than by running surpluses, then a large debt and looming future deficits would risk future inflation.
When was the last time US was not in debt? ›
As a result, the U.S. actually did become debt free, for the first and only time, at the beginning of 1835 and stayed that way until 1837. It remains the only time that a major country was without debt. Jackson and his followers believed that freedom from debt was the linchpin in establishing a free republic.Is China debt higher than 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.Why is China dumping US Treasuries? ›
Yu Yongding, a member of the Academic Divisions of the Chinese Academy of Social Sciences, said China's reduction in its holdings of US Treasury bonds is a measure to adjust the country's balance sheet of overseas assets, which can enhance the security of its overseas assets and increase the net returns on overseas ...What would happen if the US paid off its debt? ›
Dollars would flow from T-security accounts at the Federal Reserve Bank to checking accounts and then to other investments -- probably most going to bonds. With all those dollars flowing to bonds, interest rates might fall as bond prices rose.Did China stop buying U.S. debt? ›
China used to be the biggest foreign owner of U.S. Treasury securities - but not anymore. Recently, China reduced its holdings of American government debt by more than 9% to less than $1,000,000,000,000. That's $981 billion, to be precise.Who is buying U.S. debt? ›
The public holds over $24.53 trillion of the national debt, as of January 2023.1 Foreign governments hold a large portion of the public debt, while the rest is owned by U.S. banks and investors, the Federal Reserve, state and local governments, mutual funds, pensions funds, insurance companies, and holders of savings ...Which is debt free country? ›
The best example can be taken from Hong Kong (it is a one of the debt free countries), whose economy has the least debt to GDP ratio.What country is China in debt trap? ›
Laos. According to the World Bank, by the end of 2021, Laos's public debt had skyrocketed to 88% of gross domestic product, with Chinese creditors accounting for a 47% share of foreign debt. In addition, Laos owes 11% of its debt to China from bilateral loans. The firing of Bank of the Lao P.D.R.Why is the US in debt? ›
Tax cuts, stimulus programs, increased government spending, and decreased tax revenue caused by widespread unemployment generally account for sharp rises in the national debt.What happens if U.S. debt gets too high? ›
But when the debt exceeds the tipping point, your standard of living could be impacted. Interest rates may increase and that could slow the economy. The stock market could react to a lack of investor confidence, which could mean lower returns on your investments. And a recession may even be possible.
Why can't the US make money to pay off debt? ›
Unless there is an increase in economic activity commensurate with the amount of money that is created, printing money to pay off the debt would make inflation worse. This would be, as the saying goes, "too much money chasing too few goods."How much USD does China have? ›
In December 2022, China's foreign exchange reserves totaled US$3.12 trillion, which is the highest foreign exchange reserves of any country.How much does the U.S. have in assets? ›
|Sector:||Nonfinancial assets:||Financial assets:|