U.S. Debt to China: How Much Does It Own?

Exactly How Much U.S. Debt Does China Own? And Why?

China vs USA, Yuan vs Dollars
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The U.S. debt to China is $1.243 trillion, as of April 2016. That's 30% of the $4.046 trillion in Treasury bills, notes, and bonds held by foreign countries. The rest of the $19 trillion debt is owned by either the American people or by the U.S. government itself. For more, see Who Owns the U.S. National Debt?

China holds less U.S. debt than the record $1.317 trillion it held in November 2013. It's gradually lowered its holdings to allow its currency, the yuan, to rise.

That's to allow its currency to become traded more in global markets. Long-term, China wants the yuan to replace the U.S. dollar as the world's new global currency. China is also responding to accusations of manipulation. For more, see Currency Wars.

In February 2014,  China reversed course and began weakening its currency again. That's because the yuan was still pegged to the dollar. Both rose 25% in 2014 and 2015. China needed to lower the yuan to remain competitive with other emerging markets. Their currencies were free-floating. For more, see Asset Bubble and Yuan to Dollar Conversion.

China has held more than $1 trillion in U.S. debt for the last three years. That's when the Treasury Department changed how it measures the debt. Before July 2010, Treasury reports show China held $843 billion in debt. That makes it difficult to make long-term comparisons. (Source: Major Holdings of U.S. Treasury Securities, January 19, 2016.)

How Did China Become One of America's Biggest Bankers?

China is more than happy to own nearly a third of the U.S. debt. Owning U.S. Treasury notes helps China's economy grow by keeping its currency weaker than the dollar. That keeps products exported from China cheaper than U.S. products, creating jobs for its 1.4 billion people.

The United States allowed China to become one of its biggest bankers because the American people enjoyed low consumer prices. Selling debt to China allows the U.S. economy to grow by funding federal government programs. It also keeps U.S. interest rates low. However, China's ownership of U.S. debt is shifting the economic balance of power in its favor.

Why Does China Own So Much U.S. Debt?

China makes sure its currency, the yuan, is always lower than the U.S. dollar. Why? Part of its economic strategy is to keep its export prices competitive. It does this by holding the yuan at a fixed rate compared to a basket of currencies, the majority of which is the dollar. When the dollar falls in value, the Chinese government uses extra currency to buy Treasuries, which increases demand for the dollar, increasing its value. Also, China promises to redeem dollars for yuan at the fixed rate. It must keep a good supply of Treasury notes in reserve.

Holding U.S. Debt Gives China Political Clout

China's position as America's largest banker gives it some political leverage.

Now and then, China threatens to sell part of its debt holdings. It knows that, if it did so, U.S. interest rates would rise, which would slow U.S economic growth.  China often calls for a new global currency to replace the dollar, which is used in most international transactions. China does this whenever the U.S. allows the value of the dollar to drop, which makes the debt China holds less valuable.

What Would Happen If China Called In Its Debt Holdings?

China would not call in its debt all at once. If it did so, the demand for the dollar would plummet like a rock. This dollar collapse would disrupt international markets worse than the 2008 financial crisis. China's economy would suffer along with everyone else's.

It's more likely that China would slowly begin selling off its Treasury holdings. Even when it just warns that it plans to do so, dollar demand starts to drop. That hurts China's competitiveness, as it raises its export prices, so U.S. consumers start buying U.S.-made products instead. China must further expand its exports to other Asian countries, and increase domestic demand before it can call in its U.S. debt holdings.

China's Debt-Holder Strategy Is Working

Because of its ability to ship low-priced goods, China's economy grew 10% annually for the three decades before the recession. Now it's growing at 7%, a more sustainable rate. China has become the largest economy in the world. It's outpaced the United States and the European Union. China became the world's biggest exporter in 2010. China needs this growth to raise its low standard of living. Therefore, despite its threats, China will continue its position as the world's largest holder of U.S. debt.

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