China is a significant holder of U.S. debt, possessing approximately $859.4 billion. However, it’s not the largest foreign creditor of the United States. Nations engaging in debt relationships are not new, as this practice enables countries to secure financing and stimulate their economies.
:max_bytes(150000):strip_icc():format(webp)/cdn.investopedia.com_terms_u_us-national-debt-by-holder-updated-946a9e415d364962a07e5e5365ef668f.png “Breakdown of U.S. national debt holders, highlighting the share held by the U.S. government, foreign entities like Japan and China, and other public and private investors.”)
While foreign debt can be beneficial, large amounts owed to countries involved in controversy often spark concern. The substantial debt the U.S. government owes to Chinese lenders has been a recurring topic in debates, news headlines, and political discussions.
Key Points to Remember
- The U.S. government itself is the largest holder of U.S. debt.
- Japan and China are the top two foreign holders of U.S. debt.
- U.S. debt is considered a secure investment.
- The Chinese yuan’s value is linked to the U.S. dollar.
- China cannot demand immediate repayment of all its U.S. debt due to varying maturity dates.
Examining the U.S. Debt Ownership Structure
As of March 31, 2024, the total official debt of the federal, state, and local governments reached $34.5 trillion. Some experts argue that unfunded future liabilities should also be included in the federal government’s balance sheet.
Of this $34.5 trillion, the federal government owns over $6 trillion in trust funds designated for Social Security, Medicare, and other entitlements. These intra-governmental holdings represent debt the government owes to itself.
The remaining debt is held by various entities, including individual investors, corporations, and foreign governments like China. This encompasses everyone from American retirees investing in U.S. Treasuries to international financial institutions.
A Snapshot in Time
From January 2022 to January 2023, debt holdings by Japan and China decreased by 15% and 17%, respectively.
Japan is currently the leading foreign creditor, holding approximately $1.1 trillion, which is about 3% of the total U.S. debt. China ranks second, holding $859.4 billion in U.S. Treasuries, representing roughly 2.6% of the total U.S. debt.
:max_bytes(150000):strip_icc():format(webp)/cdn.investopedia.com_terms_c_china-treasury-securities-5c2d037e46e0fb00019852f3.png “Trend of China’s holdings of U.S. Treasury securities over time, illustrating fluctuations in their investment in U.S. debt.”)
The debt held by Japan doesn’t attract as much attention as Chinese-owned debt, possibly because Japan is viewed as a more aligned nation and its economy hasn’t grown as rapidly as China’s.
Other significant foreign holders of U.S. debt include the U.K. with $668.3 billion, Belgium with $331.1 billion, and Luxembourg with $318.2 billion.
Why Does China Accumulate U.S. Debt?
Chinese lenders invest heavily in U.S. Treasury securities for primarily two economic reasons. The most important reason is to maintain its currency, the yuan, pegged to the dollar. This practice has been widespread among many countries since the Bretton Woods Conference in 1944.
Pegging the yuan to the dollar helps keep Chinese exports competitive by lowering their cost, which the Chinese government believes strengthens its position in international markets. However, this also reduces the purchasing power of Chinese earners.
The Impact of Dollar-Pegging
Dollar-pegging provides stability to the yuan because the dollar is still considered a relatively stable currency. This is another reason why China favors U.S. Treasuries, as they are redeemable in dollars. While China has increased its gold reserves, the primary safety net for the yuan remains the global confidence in the U.S. dollar.
Implications of U.S. Debt to China
Politically, the notion that China “owns the United States” due to its creditor status is a common sentiment. However, the reality is more nuanced than this statement suggests.
If China were to demand repayment of all its U.S. debt, the U.S. dollar would likely depreciate, and the yuan would appreciate, making Chinese goods more expensive.
Although 2.6% of the national debt held by China is not negligible, the Treasury Department has consistently found buyers for its securities, even after credit rating downgrades.
If China were to suddenly withdraw its investments, other entities, including the Federal Reserve (which holds six times more debt than China), would likely step in to fill the gap. Furthermore, the varying maturity dates of U.S. securities prevent China from demanding immediate repayment of all its holdings.
Trade Dynamics at Play
China relies on American markets to purchase goods manufactured in China. Artificially suppressing the yuan has created challenges for the growing Chinese middle class, making exports essential for maintaining business operations.
U.S. and China Trade
China’s purchase of U.S. Treasuries helps to inflate the value of the dollar. In return, American consumers benefit from inexpensive Chinese products and incoming investment capital.
The Bottom Line
While China holds a substantial amount of U.S. debt, it is not the largest creditor. The U.S. government holds the largest portion of U.S. debt, and Japan is the leading foreign creditor. China’s holdings, approximately 2.6% of the total U.S. debt, are largely due to its policy of pegging the yuan to the dollar. The varying maturity dates of U.S. securities prevent China from calling in all its U.S. debt at once.
