US Debt to China, How Much It Is, Reasons Why, and What If China Sells
Why China Is America's Biggest Banker
The U.S. debt to China is $1.10 trillion as of October 2019. That's 26.7% of the $4.12 trillion in Treasury bills, notes, and bonds held by foreign countries. The rest of the $23 trillion national debt is owned by either the American people or by the U.S. government itself.
China has the second-greatest amount of U.S. debt held by a foreign country. Japan rose to first place in June 2019. As of October 2019, it owned $1.17 trillion. It's followed by the United Kingdom at $334.1 billion, Brazil at $298.6 billion, and Ireland at $286.6 billion.
The map below shows a breakdown of the top five countries owning U.S. debt. Combined, they hold 77.3% of U.S. debt held by foreign countries.
China has reduced its holdings of U.S. debt since November 2013, when it held $1.3 trillion. It is taking steps to make its currency, the yuan, transition to a global currency. To do that, China had to loosen its peg to the dollar. That made the yuan more attractive to forex traders in global markets. China's economy is also slowing down due to President Donald Trump's trade war. As China's exports decline, it's less able to invest in U.S. Treasurys. The chart below illustrates the breakdown of who owns U.S. debt.
China is also liberalizing its control of the yuan, also called the renminbi. It has opened yuan trading centers in London and Frankfurt. It’s allowed the yuan to trade in a wider trading range around a basket of currencies that include the dollar.
China is also responding to accusations of manipulation. Most countries want their currency values to fall so they can win the global currency wars. Countries with lower currency values export more since their products cost less when sold in foreign countries.
China has held more than $1 trillion in U.S. debt every year since 2010. That's when the U.S. Department of the Treasury changed how it measures the debt. Before July 2010, Treasury reports showed that China held $843 billion in debt. This makes it difficult to make long-term comparisons.
How China Became One of America's Biggest Bankers
China owns almost a fifth of the U.S. debt owned by foreigners. The Chinese government uses dollars it has on hand to buy Treasurys. It receives these dollars from Chinese companies that receive them as payments for their exports.
Owning U.S. Treasury notes helps China's economy grow. Demand for dollar-denominated bonds raises the dollar value compared to that of the yuan. That makes Chinese exports cheaper than American-made goods, increasing sales. The U.S. consumer benefits from low consumer prices.
What Happens If China Called in Its Debt Holdings
China's position as America's largest banker gives it some political leverage. It is responsible for low interest rates and cheap consumer goods. If it called in its debt, U.S. interest rates and prices would rise, slowing U.S economic growth.
On the other hand, if China called in its debt all at once the demand for the dollar would plummet. This dollar collapse would disrupt international markets even more than the 2008 financial crisis. China's economy would suffer along with everyone else's.
If China ever did call in its debt, it would slowly begin selling off its Treasury holdings. But even at a slow pace, dollar demand would drop. That would hurt China's competitiveness by raising the yuan’s value relative to the dollar. At some price point, U.S. consumers would buy American products instead. China could only start this process after it further expands its exports to other Asian countries and increases domestic demand.
China's Debt-Holder Strategy Is Working
China's low-cost competitive strategy worked. Its economy often grew more than 10% for the three decades before the 2008 recession. As of 2018, it's growing at almost 7%, a more sustainable rate. China has become the largest economy in the world, outpacing the United States and the European Union. China also became the world's biggest exporter in 2010. China needs this growth to raise its low standard of living. For these reasons, China will continue to be one of the world's largest holders of U.S. debt.
United States Department of the Treasury. "Major Foreign Holders of Treasury Securities (in billions of dollars) Holdings 1/ at End of Period," Accessed Nov 23, 2019.
The Hong Kong University of Science and Technology. "Renminbi Internationalization: The Prospects of China’s Yuan as the Next Global Currency," Accessed Nov. 27, 2019.
Brookings. "Is China Serious About Liberalizing the Renminbi?" Accessed Nov. 27, 2019.
U.S. Department of Treasury. "Major Foreign Holders of Treasury Securities," Accessed Dec. 28, 2019.
Federation of American Scientists. "China’s Currency Policy," Accessed Nov. 27, 2019.
The World Bank. "GDP Growth (Annual %) - China," Accessed Dec. 24, 2019.