Back in 2011, Minnesota Representative Michele Bachmann made some headlines with this quip, “With all the money that we owe China, I think you might correctly say, Hu’s your daddy,” a reference to Chinese president Hu Jintao. Without debating the wit (or lack thereof) of Ms. Bachmann’s speech writers, let’s examine what it means for China to be the largest foreign holder of U.S. debt.
Cartoons such as this may lead some people to overestimate the amount of U.S. debt held by the Chinese government. For example, the total amount of U.S. debt currently held by the public is $11.04 trillion. Intra-governmental debt adds another $4.81 trillion, bringing the total combined public debt outstanding to $15.85 trillion (103% of current dollar GDP). Approximately one-third of this total ($5.1 trillion) is held by foreign investors, the largest of which are China and Japan at around $1 trillion each. Therefore, China owns about eight percent of total U.S. debt.
Japan and the United Kingdom have a long history of owning a significant amount of U.S. debt. The recent growth of China’s investment, however, is what makes the press. In 2008, China held $684 billion worth of U.S. Treasuries. Since then, their stake has grown 75% to over $1.2 trillion. China’s share now represents one-fourth of all foreign-held U.S. government debt. While that sounds like a lot (and it is), China would seem to need our bonds just as much as we need their cash. In order to keep the world’s largest export economy humming, China has implemented policies that encourage domestic saving, while at the same time, try to keep the yuan from appreciating vis-a-vis the dollar (and other major currencies). The result is that China has accumulated more than $3 trillion in foreign currency reserves, far more than any other nation.
Most of these reserves are held in U.S. dollars and recycled back to the United States through investments in Treasury bonds, and other dollar-denominated securities. While some of China’s foreign exchange reserves are plowed into European and Japanese securities, those markets do not offer the liquidity to easily absorb China’s growing investment needs. “There’s really nothing different they can do,” says Eswar S. Prasad, Cornell economics professor and former head of the China division at the International Monetary Fund. “Even if China felt the United States was going off a cliff, there’s no other place for them to put all their money.”
We don’t want to downplay the risk of owing China (or anyone else) a trillion dollars, but think about it. Who’s getting the better deal here? If China is willing to lend the United States money for ten years at 1.5%, I think we should consider it a compliment and use our “attractiveness” wisely. Ideally, our leaders would not take this precious trust for granted. Let’s get our financial house in order while we still have the luxury of being the best of a bad lot. At the same time, think of your own personal situation. To whom do you owe money? What are you taking for granted? Any government, corporation, or individual that borrows heavily is playing a risky game of musical chairs. You never know when the music is going to stop, and you never know if you’ll be able to find a “chair” when it does.