China's Debt: America's Multi-Million Dollar Question

As of 2024, the United States owed a total debt of over $34 trillion. The US owes money to several countries, including Japan, mainland China, the United Kingdom, Ireland, Luxembourg, Brazil, Switzerland, and Belgium. While China does not disclose the exact amount of debt owed by the US, it is estimated to be around $775 billion to $859 billion as of 2023. China's holdings of US debt have declined over the years, and Japan has since become the largest foreign debt collector for the US, with holdings of about $1.1 trillion to $1.2 trillion. Despite concerns about the US becoming susceptible to creditor nations, the economic arrangement is a win-win for both the US and its creditors, with US debt being a desirable and stable asset in the global economy.

China's holdings of US debt have declined

China's holdings of US debt have indeed declined. In November 2013, China held $1.3 trillion of long-term US Treasurys. By August 2023, this had fallen to $793.5 billion, representing a 40% decline. However, when measured in the yuan, China's shedding of Treasurys doesn't look as severe. The yuan has depreciated by about 20% relative to the US dollar since November 2013, so the decline in China's Treasury holdings in yuan has been closer to 27%.

China's holdings of US debt peaked between 2012 and 2016, with a value of over $1.3 trillion. Since then, its size has been slowly declining. It dipped below $1 trillion in mid-2022 for the first time since 2010. As of December 2024, it stands at $759 billion. China's holdings fell to $859 billion in January 2023, marking the lowest level since 2009. This represents just under 20% of foreign-owned US debt, which comprises between 3% and 6% of total US debt.

There are several reasons why China continues to buy US Treasuries. Firstly, the huge size of the US trade deficit with China means Treasuries are probably the best available option. Buying US Treasuries enhances China's money supply and creditworthiness. Secondly, US debt offers the safest haven for Chinese forex reserves. Thirdly, China wants to keep its goods competitive in international markets, and this requires keeping the RMB lower than the USD. This leads to a huge pileup of USD as forex reserves for China, which the central bank uses to purchase Treasuries, which earn a stable return.

China's holdings of US debt do not provide China with undue economic influence over the United States. Any country that trades openly with other countries is likely to buy foreign sovereign debt. American debt is a widely-held and extremely desirable asset in the global economy. Whatever debt China does sell is simply purchased by other countries. For instance, in August 2015, China reduced its holdings of US Treasuries by approximately $180 billion. Despite the scale, this selloff did not significantly affect the US economy.

US debt is an in-demand asset

The US dollar is the most widely accepted currency for international trade. This means that any dollar supply eventually resides in the forex reserve of a nation or the safest investment—US Treasury securities. US debt is a widely held and extremely desirable asset in the global economy. Whatever debt China does sell is simply purchased by other countries. For instance, in August 2015, China reduced its holdings of US Treasuries by approximately $180 billion. Despite the scale, this sell-off did not significantly affect the US economy, thereby limiting the impact that such an action may have on US decision-making.

China owns a large amount of US debt but it isn't the United States' largest creditor. The greatest amount of US debt is owned by the US government. The largest foreign creditor is Japan, which has at times overtaken China as the largest foreign holder of US debt. China owns around 2.6% of US debt. China buys US debt because the Chinese yuan is pegged to the dollar. It would be impossible for China to call in all its US debt at once due to the different maturity dates of the US securities that China owns.

China's strategy is to maintain export-led growth, which aids in generating jobs and enables it, through such continued growth, to keep its large population productively engaged. Since this strategy is dependent on exports, China requires RMB to continue to have a lower currency value than the USD, and thus offer cheaper prices. If the PBOC stops interfering, the RMB would self-correct and appreciate, thus making Chinese exports costlier. It would lead to a major crisis of unemployment due to the loss of export business. China wants to keep its goods competitive in the international markets, and that cannot happen if the RMB appreciates. It thus keeps the RMB low compared to the USD. However, this leads to a huge pileup of USD as forex reserves for China.

China's large US Treasury holdings

China's large holdings of US Treasury bonds are a result of its export-led growth strategy, which generates jobs and keeps its large population productively engaged. This strategy relies on keeping the Chinese currency, the RMB or yuan, lower than the US dollar to offer cheaper prices for exports. This leads to a surplus of US dollars, which the Chinese central bank then uses to purchase US Treasuries, which are considered a safe and stable investment. As of January 2025, China's holdings of US Treasury securities were valued at approximately $760.8 billion, marking a slow decline from its peak of over $1.3 trillion between 2012 and 2016.

China's large holdings of US Treasuries have raised concerns about the US becoming a net debtor nation, vulnerable to the demands of a creditor nation. However, the reality is more nuanced. Firstly, US debt is an in-demand asset globally due to its safety, convenience, and the status of the US dollar as the world's reserve currency. Secondly, even if China wished to "call in" its loans, it is constrained by the varying maturity dates of US securities. Additionally, the US debt held by China is a relatively small proportion of total US debt, with foreign countries each comprising a small percentage of US debt holders.

Moreover, it is unlikely that China would sell its US Treasuries all at once, as this would be economically detrimental to China itself. A sudden dump of US Treasuries by China would lead to an increase in interest rates on Treasuries, as their prices in the bond market would be artificially depressed. Instead, China needs to maintain significant reserves of US debt to manage the exchange rate of its currency, the renminbi or yuan. If China were to unload its US debt holdings, its currency's exchange rate would rise, making Chinese exports more expensive in foreign markets and negatively impacting its export-led growth strategy.

The economic relationship between the US and China is complex and interdependent. China's large US Treasury holdings are a result of its trade surplus with the US and its need to maintain a competitive exchange rate. While it raises geopolitical concerns, the actual economic implications are more nuanced, with constraints and dependencies influencing the actions of both countries.

China's continuous purchase of US debt

China's primary motivation for buying US debt is to maintain its export-led growth strategy. China has a trade surplus with the US, resulting in a surplus of US dollars. To keep the Chinese yuan competitive and its exports affordable, the Chinese central bank intervenes by purchasing foreign assets, including US Treasury bonds, to avoid inflation. This also helps China enhance its money supply and creditworthiness.

Another reason for China's continuous purchase of US debt is the safety and convenience it offers. US Treasuries are considered a safe and low-risk investment, making them attractive to central banks and other investors. The US dollar's status as the world's reserve currency further contributes to the demand for US debt. Additionally, the US government's consistent repayment of its debt makes it a reliable investment option.

While China holds a significant amount of US debt, it is important to note that it is not the largest foreign creditor of the US. As of January 2023, China held approximately $859.4 billion in US Treasuries, representing about 2.6% of total US debt. This percentage has decreased in recent years, with Japan occasionally surpassing China as the largest foreign holder of US debt.

In conclusion, China's continuous purchase of US debt is driven by economic and strategic considerations. It allows China to maintain its export competitiveness and benefit from the safety and demand of US Treasuries. While it has raised concerns about US indebtedness, the impact of China's holdings on the US economy is limited, and the relationship between the two countries is one of interdependence.

US debt offers the safest haven for Chinese forex reserves

China's continuous purchase of US debt has raised concerns about the US becoming a net debtor nation, susceptible to the demands of a creditor nation. However, the reality is not as bleak as it may seem. US debt offers China the safest haven for its forex reserves, and this economic arrangement is a win-win for both nations.

Firstly, US debt is an in-demand asset. It is safe and convenient. The US dollar is the world's reserve currency, widely used in international transactions. Due to its high demand, the dollar can easily be cashed in. Additionally, the US government has never defaulted on its debt.

Secondly, China's strategy is to maintain export-led growth, generating jobs and keeping its large population productively engaged. To achieve this, China needs to keep its goods competitive in the international market, which means keeping the RMB lower than the USD. This leads to a surplus of USD as forex reserves for China.

Thirdly, China's central bank, the People's Bank of China (PBOC), actively intervenes to prevent an imbalance between the USD and RMB in local markets. It buys excess USD from exporters and gives them the required RMB, creating a scarcity of USD and keeping USD rates higher.

Finally, US debt offers China stability and creditworthiness. Selling or swapping US Treasuries would reduce these advantages. China's holdings of US debt do not provide undue economic influence over the US. Any potential "calling in" of loans by China is heavily constrained, and any debt sold is simply purchased by other countries. Thus, US debt offers the safest haven for Chinese forex reserves, ensuring China's economic objectives are met while also benefiting the US through the availability of cheap Chinese goods.

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