How Much U.S. Debt Does China Really Own?

And Is It Really a Bad Thing?

How Much U.S. Debt Does China Really Own?

Xi Jinping and Barack Obama
Chinese President Xi Jinping shakes hands with US President Barack Obama. Wang Zhou - Pool/Getty Images

How much of the USA is owned by China? The answer to that question seems to be a constant source of controversy among America’s political leaders and media commentators. The real question is: How much of the total U.S. debt does the U.S. federal government owe to Chinese lenders?

The quick answer is that as of January 2018, the Chinese owned $1.17 trillion of U.S. debt or about 19% of the total $6.26 trillion in Treasury bills, notes, and bonds held by foreign countries. That sounds like a lot of money—because it is—but it is actually a little less than the $1.24 trillion China owned in 2011. Understanding the actual extent and impact of America’s debt to China requires a closer look at these massive amounts of money.

Breaking Down the US Debt and Who Owns It

In 2011, the total U.S. debt stood at $14.3 trillion. By June 2017, the debt had grown to $19.8 trillion and was projected to top $20 trillion by January 2018. In addition, many economists contend that the reported U.S. debt should include at least another $120 trillion in unfunded future liabilities—money the government does not currently have but is legally obligated to pay people in the future.

The government itself actually holds just under one-third, about $5 trillion, of the $19.8 trillion government debt in the form of trust funds dedicated to legislatively-mandated programs like Social Security, Medicare, and Medicaid and veterans’ benefits. Yes, this means that the government actually borrows money from itself to fund these and other “entitlement” programs. Financing for these huge annual IOUs comes from the Department of the Treasury and the Federal Reserve.

Most of the rest of the U.S. debt is owned by individual investors, corporations and other public entities—including foreign creditors like the Chinese government.

Among all of those foreign creditors to which America owes money, China led the way at $1.17 trillion, followed by Japan, at $1.07 trillion as of January 2018.  

While Japan’s 4.8% ownership of the U.S. debt is only slightly less than China’s 5.3%, the Japanese-owned debt is rarely depicted in a negative light, as is China’s. This is partly because Japan is seen as a much “friendlier” nation and because Japan’s economy has been growing more slowly than China’s over the last several years.

Why China Loves to Own US Debt

Chinese lenders snap up so much of the U.S. debt for one basic economic reason: protecting its “dollar-pegged” yuan.

Ever since the establishment of the Bretton Woods System in 1944, the value of China’s currency, the yuan, has been connected or “pegged” to the value of the U.S. dollar. This helps China hold down the cost of its exported goods, which tends to make China, like any nation, a stronger performer in international trade.

With the U.S. dollar considered one of the safest and most stable currencies in the world, dollar-pegging helps the Chinese government maintain the stability and value of the yuan. In May 2018, one Chinese yuan was worth about $0.16 U.S. dollar.  

With most forms of U.S. debt, like Treasury bills, redeemable in U.S. dollars, worldwide trust in the dollar and the U.S. economy, in general, remains China’s main safeguard for the yuan.

Is America’s Debt to China Really So Bad?

While many politicians like to angrily proclaim that China “owns the United States” because it owns so much of the U.S. debt, economists say that claim is far more rhetoric than fact.

For example, critics say that should the Chinese government suddenly call in—demand immediate repayment—of all of the U.S. government’s obligations, the American economy would be hopelessly crippled.

First, because U.S. securities like Treasury bills come with varying maturity dates, it would be impossible for the Chinese to call them all in at the same time. In addition, the U.S. Treasury Department has a proven track record of being able to find new creditors very quickly when needed. As economists point out, other creditors are likely to get in line to buy up China’s share of the debt, including the Federal Reserve, already the owner of twice as much of the U.S. debt than China has ever owned.

Secondly, China needs American markets to buy their exported goods. By artificially keeping the value of the yuan down, the government reduces the buying power of the Chinese middle class, thus making the sale of exports vital keeping the country’s economy moving.

As Chinese investors buy up U.S. Treasury products, they help increase the value of the dollar. At the same time, American consumers are assured of a steady flow of relatively inexpensive Chinese products and services.

Updated by Robert Longley

 

How Much U.S. Debt Does China Really Own?

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Longley, Robert. "How Much U.S. Debt Does China Really Own?" ThoughtCo, May. 7, 2018, thoughtco.com/how-much-debt-does-china-own-3321769. Longley, Robert. (2018, May 7). How Much U.S. Debt Does China Really Own? Retrieved from https://www.thoughtco.com/how-much-debt-does-china-own-3321769 Longley, Robert. "How Much U.S. Debt Does China Really Own?" ThoughtCo. https://www.thoughtco.com/how-much-debt-does-china-own-3321769 (accessed May 26, 2018).