The United States’ debt load has risen substantially since the start of the millennium, raising concerns for the country’s long-term financial health in some citizens. But who owns all of this debt? A nation’s debt consists of the total amount of bonds it has issued or sold. The U.S. debt sits at nearly $29 trillion in September 2021. The largest investors in U.S. Treasuries are other governments and central banks.
- China, which owns an estimated $1.1 trillion in U.S. Treasuries, is the number-two investor among foreign governments.
- 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.
China's Large Position in U.S. Treasuries
China, which owns an estimated $1.1 trillion in U.S. Treasuries, is the number-two investor among foreign governments, according to the May 2021 figures released by the U.S. Treasury. This amounts to over 15% of the U.S. debt held overseas and about 3.6% of the United States’ total debt load.
Why These Big Numbers Aren't Necessarily a Problem
China’s huge investment in U.S. government bonds has stirred controversy in recent years for two reasons pertaining to perceived risk.
Slower U.S. Growth
If China stops buying or elects to sell even a small portion of its position, U.S. Treasury prices would fall, and yields would rise. The result of higher rates, in turn, would likely be slower economic growth and higher borrowing costs for the U.S. government.
Some also view China’s huge Treasury position as leaving the United States economically vulnerable to the decisions of a foreign government.
This may seem like a potential danger until you consider why China buys so much U.S. debt. Although the reason can get highly technical, in short, 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, thereby keeping the country’s export-based economy chugging along.
If the U.S. economy slows, China feels the effects because the U.S. is the third largest importer of Chinese goods.
Consequently, the Chinese economy would suffer as much, if not more, than that of the United States if China were to suddenly stop buying U.S. debt.
China Has an Interest in U.S. Debt
Since China holds such a large position in U.S. debt, the nation has a vested interest in maintaining the health of the Treasury market. Subsequently, this motivates China to avoid actions that could cause Treasury prices to plunge.
China did utilize its large position in Japanese government bonds to influence discussions surrounding Japan's purchase of disputed islands during September 2012. In addition, the Chinese government felt compelled to comment on the U.S. debt ceiling debate in October 2013.
With under two weeks to go until the United States would have exceeded the limit, thus raising the possibility of a default, China's Vice Foreign Minister, Zhu Guangyao, warned U.S. politicians that "the clock is ticking" and said, “We ask that the United States earnestly takes steps to resolve in a timely way the political issues around the debt ceiling and prevent a U.S. debt default to ensure the safety of Chinese investments in the United States.”
It is unlikely that China will sell off U.S. debt because of the effects that would have on the country's economy.
This helps demonstrate that China may indeed try to influence the course of events in the United States when it perceives a threat to its interests.
Would China Stop Buying U.S. Treasuries?
One aspect of China's economy argues against its being able to invest as much in Treasuries as it did in the 1990s and 2000s. For years, China generated a massive amount of dollar earnings by virtue of its trade surplus with the United States.
These dollars need to be invested somewhere, and the U.S. Treasury market, due to its enormous size, was one of the few places that China could recycle its surplus greenbacks without disrupting the market. Today, however, China's trade surplus is shrinking, which means fewer dollars to invest in Treasuries.
Don't Overemphasize Global Trends
The bottom line here is that the rising level of U.S. debt is problematic. To many citizens, the high percentage of Treasuries now owned by a rising economic rival seems even more troublesome. While little reason exists to expect that China will engage in any actions amounting to economic warfare, it may still be compelled to buy fewer Treasuries due to its decreasing trade surplus.
Inividual investors are better served by constructing their bond portfolios based on their own specific situation rather than news headlines or broader global trends.