America, while a great nation, is a debtor nation. It’s a reality that Americans have had to face for generations, and to many people, it’s worrisome that the nation owes trillions of dollars to foreign creditors and particularly China, a potential antagonist. But how large is the US debt to China, and how big a problem is it?
We often hear people claim that China effectively “owns the US”, or has the ability to use debt as a weapon against the US. The concern is understandable, but to a certain extent, it may be based on certain misconceptions of the nature of U.S. debt. It’s important to consider how the U.S. borrows as well as how and when the debt is repaid.
After breaking down who actually owns the U.S. debt and how much, we can get a better sense of China’s actual stake in the debt compared to other creditors. With that, perhaps we can alleviate some concerns and offer a greater understanding of how America’s debt is distributed.
How the U.S. Borrows
The way the U.S. borrows has similarities to how people borrow money from each other, but it’s not exactly the same process. Certainly, all parties involved keep track of who owes what, but it’s not a simple cash transaction like one might imagine it is.
The process starts with the U.S. Treasury, which issues bonds. These bonds are sold at auctions, and anyone can buy the bonds, including China. As the U.S. Treasury explains, it “delivers securities to bidders who were awarded securities in a particular auction. In exchange, Treasury charges the accounts of those bidders for payment of the securities.” These Treasury bills are either issued at “par” or the bond’s face value, or a discount, to the winning bidders.
The U.S. Treasury also emphasizes that these bonds are paid at par value upon the maturity date. This means that the bonds, despite what some people might believe or fear, are not “callable”; the bondholder gets the agreed interest rate, and the principal is paid when the bond’s term ends.
It’s really as simple as that. There’s no risk of China “calling in the debt”. U.S. Treasury bondholders can’t do this.
Granted, the bond owners aren’t required to hold their Treasury bonds until the maturity date. These bonds can be sold on the secondary market.
If the Chinese sold a large number of bonds they would lose a great deal of money. The bonds are worth less than face value (some of the interest has already been paid) and most investors would rather buy newer bonds at a higher interest rate.
But again, in this scenario, China’s bondholders would simply be selling their U.S. Treasury bonds to another investor; there’s still no “calling in” of the debt. So, in short, there’s really no threat here. This should help to quell any concerns that China’s U.S. debt holdings are a threat to U.S. security, or that they somehow give China leverage over the U.S.
What – or Who – Owns the U.S. Debt?
Unfortunately, America’s total debt outstanding has been above the $30 trillion mark for a while now. Furthermore, the U.S. must pay interest on all of that debt. That interest rate changes over time and fluctuated between roughly 1.5% and 3% during the past decade. In just 2021 alone, the U.S. spent $550 billion just to service the interest on the federal debt; this doesn’t even address the principal debt itself.
This can help us to understand why anyone or any nation would choose to loan money to the U.S. government. Over time, the interest payments can really add up, making lending to the U.S. Treasury a potentially lucrative and highly secure investment.
Who or what owns the $30 trillion in U.S. government debt, though?
It may be tempting to assume that nameless, faceless entities own all of America’s debt, but that’s actually not the case. Remember, buying up America’s debt isn’t an activity that’s limited to a select few people or organizations. Anyone can buy U.S. Treasury bonds at an auction; if they win the auction, they get to own the bonds. Alternatively, just about anyone can purchase a Treasury bond secondhand through the bond market.
This should make it somewhat less surprising, then, to learn that the majority of America’s debt is actually held in the U.S. Interestingly enough, U.S. investors collectively own $9.8 trillion worth of America’s debt, making them the number-one U.S. debt holder. So, this ought to come as a relief to anyone who’s worried about China having a monopoly on America’s debt – it simply isn’t the case.
Moreover, the number two and three U.S. debt owners are also based in America. At number two is the nation’s central bank, the U.S. Federal Reserve, with $5.3 trillion worth of American debt. The third place belongs to Social Security, which holds $2.9 trillion of U.S. debt.
Skipping around a bit, we’ll also find that the U.S. Department of Defense is in fifth place with $1.3 trillion, the Civil Service Retirement & Disability Fund takes seventh place with $0.9 trillion, and Medicare rounds out the list in tenth place with $0.3 trillion worth of America’s debt.
|US Investors||$9.8 trillion|
|US Federal Reserve||$5.3 trillion|
|Social Security||$2.9 trillion|
|US Department of Defense||$1.3 trillion|
|Civil Service Retirement & Disability Fund||$0.9 trillion|
|United Kingdom||$0.5 trillion|
How Large Is the U.S. Debt to China?
Thus, we can rest assured that the majority of America’s debt is, indeed, held domestically. Still, there are foreign holders of U.S. debt, and China is among them.
In fourth place among America’s top debt holders is an Asian nation – but it’s actually not China. It’s Japan, with around $1.3 trillion, similar to the annual budget of the U.S. Department of Defense. China holds sixth place on the top-ten list, with roughly $1.1 trillion of U.S. debt. That’s just under 4% of the total US debt of $28.2 billion.
Granted, China’s $1.1 trillion puts it far ahead of the U.K. ($0.5 trillion) and Ireland ($0.3 trillion), as well as other runners-up such as Switzerland, Belgium, France, and Taiwan. Pick any two of those countries, and China currently owns more U.S. debt than both of them combined.
We have to put things into perspective, though. Being number six on the list doesn’t actually make China a huge U.S. debt holder. Since China owns less than 4% of outstanding U.S. debt, it’s really not accurate to say that America is somehow beholden to China.
At the end of the day, we can be reasonably concerned about America’s growing debt without worrying about a China “debt threat.” There is no way for China to “call in” the debt, and besides, the majority of the debt is owned by U.S. interests. So, while China does in fact own a sliver of America’s debt, it doesn’t pose a hazard to the nation’s security or its integrity.