Reader Mailbag: Are the Chinese Buying All of Our Debt?

Part 2 of 3 part series. Find part 1 here.

Today we’ll be looking at the second part of Matthew W’s question: Is China really buying up all our houses and debt and does it matter?

No, the Chinese do not buy all of our debt, but they do buy a lot of it. The below chart is a few years old, but I like how it illustrates the data and the percentages have not changed drastically (although Japan now holds slightly more US debt than China).

Before getting into the implications, let’s look at why China buys US debt. 

The US buys a lot of stuff from China. A lot. Like the most stuff one country has ever bought from another. 

When someone in the US buys something from someone in China, the American buyer sends US Dollars (USD) to the Chinese seller. The Chinese seller now has USD, which is not very useful in China. So the Chinese seller exchanges his USD for renminbi (RMB), with the government. Now, the government has a bunch of USD.

The Chinese government has trillions of USD, so they have a lot left over even after spending and investing hundreds of billions of it. Rather than holding over a trillion in cash, they buy US Treasuries, AKA US debt. There’s little else that you can do when you have that much cash. This, China is more or less forced to own a lot of US debt due to the trade surplus that they have with the US.

Every election cycle includes politicians railing against the fact that we’re indebted to China and they control us. But let’s look beyond the rhetoric and see if China’s lending to us matters at all, much less in a negative way. A few important points: 

  1. There’s an old joke that if you owe the bank hundreds, that’s your problem. If you owe the bank millions, that’s their problem. In all seriousness, this is sovereign debt, not collateralized by anything. China does not have a claim on US assets or the right to repossess anything.
  2. US debt is owed in a currency that the US can print at will. Domestic politics may create situations where the US does not have the willingness to pay (a la the debt ceiling debacles in Congress), but it will always have the ability to pay.
  3. Given the above, having a large trade deficit where China holds our debt does not seem like a bad situation. We buy actual, physical goods with money…that we print. And they’re forced to buy our debt with it. We send paper and electronic currency and we get real things back.
  4. Lastly, the marginal demand for debt from China probably keeps US rates lower than they’d be otherwise. 

The next and final post of this series will look at the question of whether China can or will sell their US debt and the possible implications. Stay tuned.

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Disclosures & Disclaimers page for a full disclaimer.

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