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
Most nations borrow money, but they don’t use the same process that individuals use. Countries don’t apply for loans. They use a process more similar to the way a large corporation borrows
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.
Each bond has a fixed maturity date. The owner collects the interest specified in the bond, and on the maturity date the US government pays off the principal.
Who Owns the U.S. Debt?
America’s total debt outstanding has been above the $30 trillion mark for a while now. 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?
Anyone can buy U.S. Treasury bonds at an auction; if they win the auction, they get to own the bonds. Buyers can also 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.
Top 10 Holders of US National Debt
|1||US Investors||$9.8 trillion|
|2||US Federal Reserve||$5.3 trillion|
|3||Social Security||$2.9 trillion|
|5||US Department of Defense||$1.3 trillion|
|7||Civil Service Retirement & Disability Fund||$0.9 trillion|
|8||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.
US Treasurys Owned by China (2000-2022), in USD billions
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.
Why Does China Buy US Debt?
China has a large trade surplus with the US: they sell more to the US than the US sells to them. That means they accumulate large numbers of dollars.
Chinese exporters earn dollars, but they need yuan to pay their local costs. If they went out and sold their dollars on the open market, they would push the value of the yuan up and the value of the dollar down.
The Chinese government doesn’t
t want that to happen. Their economy is built on exports, so they want to keep the value of the yuan low to keep their exports competitive. Export-dependent countries have the incentive to keep the value of their currency low.
So the People’s Bank of China steps in and buys the dollars from the exporters at a rate it sets. The exporters get their yuan, and China keeps the value of the yuan at an advantageous level.
That leaves the People’s Bank of China with a whole lot of dollars that it needs to keep somewhere safe and earn interest in the process. The safest way to do this – in fact, the only really practical way to do this – is to buy US bonds.
Can China “Call In” the US Debt?
Some people fear that China can effectively bankrupt the US by “calling in the debt”, or demanding immediate repayment. This fear is misplaced.
US bonds have fixed maturities: The U.S. Treasury 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 or anyone else “calling in the debt.” U.S. Treasury bondholders can’t do this. They can sell their bonds, but they can’t demand immediate repayment.
What Happens if China Sells the Debt?
Bond owners aren’t required to hold their Treasury bonds until the maturity date. These bonds can be sold on the secondary market. Anyone who owns a bond can sell it.
Bonds are sold at a discount to face value. Some of the interest has already been paid to the original owner, which makes the bond less valuable.
The bond market works on supply and demand. If someone wants to sell a lot of bonds at the same time, the price goes down.
That’s especially true when interest rates are rising. To sell an old bond with a low interest rate, you’d have to offer it at a huge discount. If you don’t, the buyer will simply buy a new bond with a higher interest rate instead.
If the Chinese dumped US bonds, they would lose a staggering sum of money. They might push the dollar’s value down, but that would make Chinese exports more expensive and hurt China more than the US.
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.
The Bottom Line
The US and China are strategic competitors, and many observers see the relationship between the two countries entirely through that lens. This leads to the belief that China buys US debt for a strategic reason and intends to “weaponize” the debt.
China and the US also have a deep and complex economic relationship that involves a great deal of interdependence. China buys US debt not because it’s a potential weapon but because they need a place to park their dollars without letting the value of the yuan rise.
America’s growing debt is cause for concern, but there’s no real reason to worry 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.