How Much U.S. Debt Does China Own?

China's position in U.S. Treasuries
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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 just over $22 trillion in February 2020, and the largest investors in U.S. Treasuries are other governments and central banks.

China's Large Position in U.S. Treasuries

China, who owns an estimated $1.1 trillion in U.S. Treasuries, is the number-two investor among foreign governments, according to the January 2020 figures released by the U.S. Treasury. This amounts to over 21% of the U.S. debt held overseas and about 7.2% of the United States’ total debt load.

Why These Big Numbers Aren't Necessarily a Problem

Two reasons lie behind the fact that China’s huge investment in U.S. government bonds has stirred controversy in recent years because of the perceived risks.

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.

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.

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 provides motivation for China to avoid actions that could cause Treasury prices to plunge.

That being said, 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.” This helps demonstrate that China may indeed try to influence the course of events in the United States when it feels a threat to its interests exists.

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, and that means fewer dollars to invest in Treasuries.

Don't Overemphasize Global Trends

The bottom line: the rising level of U.S. debt is problematic, and 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.

With that in mind though, individual investors are better served by constructing their bond portfolios based on their own specific situation rather than news headlines or broader global trends.