The United States’ debt is a complex topic, often discussed in the context of budget deadlines and potential economic consequences. A common question is: how much money does the U.S. owe China? To understand this, let’s break down the U.S. national debt and its relationship with other countries, including China.
The U.S. debt is divided into two main categories: debt held by the public and intragovernmental holdings. As of recent reports, the debt held by the public is over $24.64 trillion. This includes Treasury bonds and notes purchased by various entities, including banks, insurance companies, state and local governments, foreign governments, and private investors.
The remaining portion, around $6.83 trillion, is intragovernmental holdings, which is essentially debt the government owes to itself. Federal trust funds, like those managed by the Social Security Administration, the Department of Defense, and the United States Postal Service, invest in Treasury securities, effectively lending money to the Treasury.
In total, foreign entities hold approximately $7.4 trillion in U.S. debt. Japan holds the largest share, with $1.1 trillion, followed by China with approximately $859 billion, and the United Kingdom with $668 billion.
China’s Holdings of U.S. Debt
While $859 billion is a significant amount, economists often contextualize it by comparing it to the overall size of the U.S. economy. Scott Morris, a senior fellow at the Center for Global Development, notes that the amount of debt the U.S. owes to other countries isn’t “particularly problematic” when viewed in this light.
Alt text: Illustration showing a visual representation of the US national debt and its components, including debt held by the public and intragovernmental holdings.
China’s accumulation of U.S. debt is tied to its economic growth and trade relationship with the United States. Following China’s entry into the World Trade Organization (WTO), it experienced a surge in exports to the U.S. China then invested a significant portion of its earnings in U.S. Treasurys, largely due to their perceived safety as an investment. By 2008, China had surpassed Japan as the largest foreign holder of U.S. debt.
However, in recent years, Japan has reclaimed its position as the top foreign holder of U.S. debt. Similar to China, Japan sells a substantial amount of goods to the U.S. and invests a considerable portion of the proceeds in U.S. Treasurys.
Historical Context: Debt and Defaults
Historically, many countries have owed money to the U.S., and while some have made late payments, instances of outright default are rare. Anna Gelpern, a professor at Georgetown University Law Center, points to Britain’s repayment of a $4.3 billion U.S. loan after World War II, which took over 60 years.
During the 1930s, several countries defaulted on debts to the U.S. from World War I, leading to lasting consequences, such as restricted access to U.S. securities and money markets.
It’s also important to note that when a country faces difficulties in repaying its debts, the debt may be rescheduled or even forgiven. The United States has forgiven debt owed by other countries in the past, such as Iraq in 2004 and some of the world’s poorest countries in 2000.
The Debt Limit and Budgeting Process
The U.S. debt limit is the total amount the government is authorized to borrow to meet its existing legal obligations, including Social Security, Medicare, and military salaries. The debt limit has been raised or extended approximately 80 times since 1960, and the U.S. has never defaulted on its debt.
Alt text: Portrait of Janet Yellen, U.S. Treasury Secretary, discussing the debt limit and its potential consequences.
The process for setting the budget and addressing the debt limit are often separate, leading to potential conflicts. The president submits a budget to Congress by the first Monday in February, which includes estimates of government income and spending. Congress then aims to agree on a joint budget resolution by April 15.
However, even with an approved budget, the Treasury’s ability to borrow money to fund government operations can be constrained by the debt ceiling. The Bipartisan Policy Center (BPC) has proposed linking the debt limit to the annual budgeting process to address this issue.
Some lawmakers and groups, like the Center on Budget and Policy Priorities, advocate for abolishing the debt limit altogether to avoid potential economic disruptions.
In conclusion, while the U.S. owes a substantial amount of money to China, it’s essential to consider this debt within the context of the overall U.S. economy and its global financial relationships. The U.S. debt situation is complex and tied to various economic and political factors.
