China is one of the United States's largest creditors, owning about $859.4 billion in U.S. debt. It doesn't own the most U.S. debt of any foreign country, however.
Nations borrowing from each other may be as old as the concept of money. Foreign debt provides the opportunity for countries to secure financing that they ordinarily wouldn't have access to and to stimulate their economy.
The concept of foreign debt carries a negative connotation, however, especially when it concerns large amounts owed to nations embroiled in controversy. The huge amount of debt that the U.S. government owes Chinese lenders has been the subject of countless debates, headline news stories, and political platforms for decades.
Key Takeaways
- The largest holder of U.S. debt is the United States government.
- The top two foreign holders of U.S. debt are Japan and China.
- American debt is considered a sound investment whether you're an American retiree or a Chinese bank.
- The Chinese yuan is tied to the U.S. dollar like the currencies of many nations.
- China would be unable to call in all its Treasury holdings at once because of varying maturity dates.
How the Ownership of U.S. Debt Works
The total amount of official debt owed by the federal, state, and local governments was $34.5 trillion as of March 31, 2024. Some experts insist on adding hundreds of trillions in unfunded future liabilities to the federal government balance sheet.
More than $6 trillion of the $34.5 trillion in government debts is owned by the federal government in trust funds. These accounts are dedicated to Social Security, Medicare, and other entitlements.
The government wrote itself a really big IOU and bankrupted one account to finance another activity. IOUs are formed and financed through joint efforts of the U.S. Department of the Treasury and the Federal Reserve.
Much of the remainder of the debt is owned by individual investors, corporations, and other public entities. This includes everyone from retirees who purchase individual U.S. Treasurys to the Chinese government.
The debt to Japan and China decreased by 15% and 17% respectively from January 2022 to January 2023.
Japancommands the top spot among foreign creditors with $1.1 trillion, about 3% of total U.S. debt owed by the U.S. government. China holds the number two position with $859.4 billion of U.S. Treasurys, about 2.6% of the total U.S. debt.
Japanese-owned debt doesn't receive nearly as much negative attention as Chinese-owned debt because Japan is seen as a friendlier nation and the Japanese economy hasn't grown as fast year after year as China's.
Other countries that hold the most U.S. debt include the U.K. with $668.3 billion, Belgium with $331.1 billion in debt securities, and Luxembourg, slightly behind Belgium with $318.2 billion of the United States' debt.
Why China Owns So Much U.S. Debt
Chinese lenders bought up so many U.S. Treasury securities for two main economic reasons. The first and most important is that China wants its currency, the yuan, pegged to the dollar. This has been common practice for many countries ever since the Bretton Woods Conference in 1944.
A dollar-pegged yuan helps keep down the cost of Chinese exports, which the Chinese government believes makes it stronger in international markets. This also reduces the purchasing power of Chinese earners.
Effects of Dollar-Pegging
Dollar-pegging adds stability to the yuan because the dollar is still seen as one of the safest currencies in the world. This is another reason why the Chinese want Treasurys. They're essentially redeemable in dollars.
China drew some headlines in 2013 and 2014 for buying up a lot of gold to store in its bank vaults but the real safety net for the yuan is the worldwide belief in the dollar.
Consequences of Owing Debt to the Chinese
It's politically popular to say that the China "owns the United States" because it's such a huge creditor but the reality is very different from the rhetoric.
The U.S. dollar would depreciate and the yuan would appreciate if China called in all its U.S. holdings, making Chinese goods more expensive.
Although 2.6% of the national debt isn't insignificant, the Treasury Department has had no problems finding buyers for its products even after a rating downgrade.
Others would likely step in to service the market if the Chinese suddenly decided to call in all the federal government's obligations and this isn't possible because of the maturities of debt securities. This includes the Federal Reserve which already owns six times as much debt as China.
The Effects on Trade
The Chinese rely on American markets to buy Chinese-produced goods. Artificially suppressing the yuan has made it difficult for a growing Chinese middle class so exports are necessary to keep businesses running.
The Chinese buy up dollar bills in the form of Treasurys. This helps inflate the value of the dollar. American consumers get cheap Chinese products and incoming investment capital in return. The average American is made better off by foreigners providing inexpensive services and demanding only pieces of paper in return.
How Much Money Does the U.S. Owe China?
The United States owed China approximately $859.4 billion as of January 2023.
What Country Owes the Most Money to China?
China doesn't publish the figures on its international lending but some countries such as Niger, Cambodia, and Laos owe debt to China which is more than 20% of their GDP.
Does Any Country Have No National Debt?
According to the International Monetary Fund (IMF), the only nation with no national debt is Macao, a special administrative region of China.
Which Country Has the Most Debt?
Sudan has the most debt in the world as of 2024, accounting for approximately 280.3% of its gross domestic product (GDP).
The Bottom Line
China owns a large amount of U.S. debt but it isn't the United States's largest creditor. The greatest amount of U.S. debt is owned by the U.S. government. The largest foreign creditor is Japan.
China owns around 2.6% of U.S. debt which it buys because the Chinese yuan is pegged to the dollar. It would be impossible for China to call in all its U.S. debt at once due to the different maturity dates of the U.S. securities that China owns.
