[Istanbuller]

It means China will hold more US government bonds. China owns US more as US spends more. China can ask anytime for US to announce to be defaulted.

[late]

It means China will hold more US government bonds. China owns US more as US spends more. China can ask anytime for US to announce to be defaulted.

depends on how they handle it. The government has become quite fond of owing money to itself.

[noemon]

China has steadily accumulated U.S. Treasury securities over the last few decades. As of January 2021, the Asian nation owns $1.095 trillion, or about 4%, of the $28 trillion U.S. national debt, which is more than any other foreign country except Japan. As the trade war between the two economies escalates, leaders on both sides seek additional financial arsenal.

As tensions escalate between the US and China—over trade, Hong Kong, Taiwan, and even TikTok—officials have expressed concern that Beijing could use its stockpile of US Treasury bonds to destabilize the US economy and pressure Washington into backing down. Regular people are worried too: In a 2018 Pew Research Center survey, America’s debt to China was the top concern among respondents in the US, with 89% saying the problem was “very serious.”

There’s a lot of fear, confusion, and misapprehension about why the US is in debt to China and what what would happen if China were to call it in. Quartz has answers to the most common questions about US debt to China below.

What is US debt and why do other countries own it?
To finance its ever-increasing expenses, the US federal government issues bonds and other debt instruments, known as Treasury securities, which institutions and other countries can buy. So, “US debt” colloquially refers to the value of the outstanding Treasury securities that the federal government has issued to finance its budget.

Holders of US Treasurys receive interest payments twice a year. When the bonds mature, meaning they reach their expiry date, their owner gets paid back in full.

It’s completely normal for countries to buy other countries’ debt. Most governments don’t default on their debts so it’s a low-risk asset to hold. But not all government bonds are born equal: Some are considered safer than others, based on a mix of market perception, how easy they are to buy and sell, and factors like a country’s credit rating.

The fact that China owns a lot of US debt makes sense. It’s the second largest economy in the world. It has a massive trade surplus with Washington, meaning it exports more to the US than it imports from the US. So it can use its reserve of US dollars to buy Treasurys.

China can also use its foreign exchange reserves to influence the value of its currency. So, let’s say China wanted its exports to be cheaper and therefore the yuan to be weaker. It could buy US Treasurys to increase the value of the US dollar. That’s been a major fear of US president Donald Trump’s and earlier this year, Beijing and Washington agreed in phase one of their trade deal (pdf, p. 5-1) to “refrain from competitive devaluations and the targeting of exchange rates for competitive purposes.” But China appears to do this less than the president thinks it does; while the yuan’s relative value may fall, there’s a big difference between currency devaluation and currency manipulation.

How much US debt does China own?
The US national debt has grown during the Covid-19 pandemic and is now roughly $26 trillion. Yes, that is a lot—the most in the world, in nominal terms. Most of it is owned by domestic actors, either consumers, banks, or institutions like the Federal Reserve. Foreign investors—mostly governments or central banks—hold $6.13 trillion of US Treasury bonds. Of that, mainland China purportedly owns $1.1 trillion.

But that number doesn’t tell the full story. First, it doesn’t count investors from Hong Kong, a special administrative region of China, which is the fifth largest holder of US debt. Second, it doesn’t take into account the fact that China buys Treasury securities through custodial accounts in Belgium, the 10th largest holder of US debt, and potentially other countries too.

In 2007, then-presidential candidate Hillary Clinton famously referred to China as America’s “banker.”

What will happen if China calls in US debt?
There’s a couple of things Beijing could do if it wanted to destabilize the US economy, but both would come at a cost.

First, it could sell its Treasurys. According to the Center for Strategic & International Studies (CSIS), “even if China wished to ‘call in’ its loans, the use of credit as a coercive measure is complicated and often heavily constrained.” Since US Treasurys are highly sought after, there would likely be plenty of buyers if Beijing decided to sell. In fact, in 2015, China sold about $180 billion of Treasury bonds and, as Bloomberg reported at the time, “the market barely reacted.” Trump himself said he is “not worried about it at all.”

China could also let its US Treasurys mature and not renew them. But the US constantly issues new bonds before the old ones mature to refinance its debt. And if China decided to sell and there wasn’t enough demand, the Federal Reserve—which owns $2.3 trillion of US debt—or other major central banks like the Bank of Japan could step in to keep interest rates down.


China could sell a lot of its Treasurys suddenly and without warning, and it would take time for the Federal Reserve or foreign investors to step in. This would destabilize the markets but also hurt China, which is a major global exporter.

In April, The Washington Post ran a story suggesting that the Trump administration had discussed “having the United States cancel part of its debt obligations to China.” Officials quickly dismissed the idea. “Full faith & credit of US debt is sacrosanct,” National Economic Council director Larry Kudlow told Politico. “And so is dependable currency as world’s reserve currency. Period. Full stop.”

What is China’s ‘debt trap’ strategy?
Some of the anxiety around China holding a lot of US debt might stem from the country’s reputation for engaging in “debt-trap diplomacy.” As Quartz has reported before:

The name surfaced in the title of a 2017 analysis by an Indian strategic commentator that argued China was offering funding for unsound projects to secure Chinese access to resources or local markets, rather than to help local economies, and as a result “countries are becoming ensnared in a debt trap that leaves them vulnerable to China’s influence.”

This has come up often in recent years in the context of infrastructure projects in developing countries financed through China’s Belt and Road Initiative.

But while the US certainly relies on China to buy a lot of US Treasurys, essentially lending it money, China isn’t giving the US a loan the way a bank would—it’s buying US debt on financial markets. The reality is that both countries’ economies are highly interdependent.

[JohnRawls]

It means China will hold more US government bonds. China owns US more as US spends more. China can ask anytime for US to announce to be defaulted.

No they can't. There are rules on how this debt is managed and paid. US has no problem with debt management and can pay the full summ if needed although that is not even needed because China can't just request it to be paid straight away.

[Rancid]

China can ask anytime for US to announce to be defaulted.

lolwhut?

No you jack ass. Bonds have a schedule, you can't just call in debt.

What you can do is sell off the debt in the open market. However, it would hurt Beijing too.

Also, China has in the past, sold a lot of their bonds in the past, and the market just ate them up. It's not clear if a sell off would really hurt the US all that much.

[late]

lolwhut?

No you jack ass. Bonds have a schedule, you can't just call in debt.

What you can do is sell off the debt in the open market. However, it would hurt Beijing too.

Also, China has in the past, sold a lot of their bonds in the past, and the market just ate them up. It's not clear if a sell off would really hurt the US all that much.

They could hurt us, problem is, it would take down their economy along with ours.

[Rancid]

They could hurt us, problem is, it would take down their economy along with ours.

Correct. It's a double edge sword.

[Potemkin]

Correct. It's a double edge sword.

A double edged sword is still a sword.

[Unthinking Majority]

Pretty sure you can't just cash in your US treasuries anytime you want them. If you (or China) buy a 10-year US treasury bond the US will pay it out to you in 10 years, not 9 or 11, at the agreed upon interest rate at time of sale. This makes things predictable so the US won't default.

The reason China probably owns all that debt is because they have a lot of money and you have to invest it somewhere. The safest investment in the world is the US economy. You buy a US bond and you know they won't default on it. Not so if you buy a government bond from Zimbabwe.

[AFAIK]

But who is wielding the sword....

The U.S. Could Seize China’s Treasury Holdings

China was massively negligent by covering up the release of SARS-CoV-2. The toll in human suffering and economic losses are incalculable. The U.S. could seize Chinese holdings of U.S. Treasury securities and convert them to a trust fund to help make up some of the costs. It’s simple justice for the original crime.

Some say China would consider that an act of war. But guess what? The war started ten years ago. China has been conducting unfair trade policies, intellectual property theft and technology theft for years. Only recently has the U.S., led by Trump, stood up to China.

[Rancid]

A double edged sword is still a sword.

Of course. Arguably that sword will hurt China more though (see below). Hence why they are not using that sword, and why their selloff in 2015 had no effect on the US/West.

Pretty sure you can't just cash in your US treasuries anytime you want them. If you (or China) buy a 10-year US treasury bond the US will pay it out to you in 10 years, not 9 or 11, at the agreed upon interest rate at time of sale. This makes things predictable so the US won't default.

Correct, this is called the bond schedule. You have to wait until it matures to get all the money back from the government. However, what you can do is sell the bond on the secondary markets. At which point, you have to accept market rate, not the face value of the bond. Also, when you sell this way, the government isn't paying you, the buyer will be paying you. I own treasuries (I buy them direct from the government). Just like China, I cannot "call in the debt" as so many people falsely believe. This whole "call in the debt" shit is funny. What I can do, is simply get on my brokerage account, and sell them at market rate, which could be more or less of the face value that I paid.

As I said, back in 2015, China did a massive sell off of US treasuries, and no one batted an eye. The markets simply gobbled them up which prevented the yields from going up (or price going below face value, however you want to see it); it was like nothing happened. I think part of the reason is that everyone understands how insidious and sneaky the CCP is on trade and other matters. Thus, no matter what China does, the US/west will still be a safer place to invest than China. This actually helps buffer the west from China trying to punish the west. That is precisely what happened in 2015. It's a risk to put your money in authoritarian China because they try to manipulate the game too much. This makes the rest of the world look like safer investments. Thus, when China tries some shit, the rest of the world shrugs it off, because we all know how shitty China is.

What I'm saying is, the fact that the CCP is a shithole gutter government, means the US/west will fair better in any sort of bond sell off scenario from China, simply because their government sucks ass.

Now, let's say China did sell off treasuries and it did cause yields to go up. This hurts China a lot because it will make the Yuan more competitive, which means Chinese exports will get too expensive. This would encourage domestic manufacturing to return to the west. As we know, China is an export economy, we also know that China is trying to create domestic demand to not be reliant on foreign markets. If they are successful in doing that, then it means they give up their leverage on the west. It means the bond sell off as a way to punish the west becomes even less effective.

The point here is, this whole "using bonds as a weapon" just simply isn't a good weapon. China knows this, hence why they don't really do this. 2015 was a small scale test, to see how this would play out for China. Turned out, it was a dud for China.

[Crantag]

Pretty sure you can't just cash in your US treasuries anytime you want them. If you (or China) buy a 10-year US treasury bond the US will pay it out to you in 10 years, not 9 or 11, at the agreed upon interest rate at time of sale. This makes things predictable so the US won't default.

The reason China probably owns all that debt is because they have a lot of money and you have to invest it somewhere. The safest investment in the world is the US economy. You buy a US bond and you know they won't default on it. Not so if you buy a government bond from Zimbabwe.

It's my understanding that the theoretical scenario involves China dumping US treasuries on the open market. This would lead to a collapse in the value of these securities and severly undermine the value of the dollar.

China doesn't choose US treasuries against other countries like that really. A critical component is the status of the US dollar as the currency of international settlement. When China sells to the US (as well as is the case when many countries trade among themselves) they are paid in dollars. Trade in US dollars leads to a lot of 'foreign investment' in the US. Whilst sitting on dollars, you can either use them, convert them, or buy assets with them.

Japan's US treasury holdings are largely borne of their decades of trade surplus. Same goes for oil sheiks buying ports and shit.

China doesn't want to slay the golden goose of course, but the situation is a matter worthy of consideration.

I suppose in a hot shooting war the US would probably just cancel their obligations and seize the assets or some shit though.

[Patrickov]

It's my understanding that the theoretical scenario involves China dumping US treasuries on the open market. This would lead to a collapse in the value of these securities and severely undermine the value of the dollar.

This hypothesis is based on some anti-Americans thought that the USD's value is, very much like dictators' power, is only based on others being forced to let them to. I strongly believe this is not such a case, and frankly I see no valid proof to support this hypothesis.

No currency can be forced into creditability if there are not enough credible entities who genuinely entrusts it.

@Rancid has explained the matter better so I am not going to throw mine, which is shit compared to his or (admittedly) yours.

[Rancid]

This would lead to a collapse in the value of these securities and severly undermine the value of the dollar.

It certainly can. The point is, this would hurt China, not just the US. Hence, it's not a useful weapon for China to wield. They have many other better weapons against the US. Like IP theft and buying off countries.

[Crantag]

@Patrickov (Quote function is not working for some reason )

"This hypothesis is based on some anti-Americans thought that the USD's value is, very much like dictators' power, is only based on others being forced to let them to. I strongly believe this is not such a case, and frankly I see no valid proof to support this hypothesis.

No currency can be forced into creditability if there are not enough credible entities who genuinely entrusts it.
Rancid has explained the matter better so I am not going to throw mine, which is shit compared to his or (admittedly) yours."

I think of it like in some ways the USD is the least bad alternative. There are elements of coercion involved too. The US military, including its expansive navy, projects US power and regularly intervenes militarily, certainly in part to keep the spigots flowing. This can be seen in petrodollar politics and elsewhere.

China has been actively pursuing alternatives to USD denominated international trade, including through bilateral trade agreements (which don't really on US dollars for settlement, such as which they have with energy rich Russia among other countries), the setting up of their own oil futures exchange, their construction of new trading routes through the belt and road, etc.

It essentially amounts to what I would call a relative shift in the balance of power which has occurred over the past couple of decades, though with the US still in the hegemonic position.

I don't think China is slowing down though. The massive expanse of China in terms of territory, population, and urban development are rather awesome. The experience of driving through any random Chinese city and passing by office complex after office complex is an impressive site.

Another thing that left an impression on me were my visits to the Chinese embassy (for visas) and the American embassy (for a new passport) in Tokyo. The Chinese embassy was teaming. The American embassy was barren. In the Chinese embassy, the diligent and very busy staff process mountains of paperwork on a daily basis. In the American embassy, the women working the desk had time for idle chitchat about the goings on in their day-to-day.

I am not one that sees China slowing down. Moreover, the development of domestic demand/consumption in China is a major and rapidly expanding fueling force, not unlike the development path previously undertaken in the US.

[AFAIK]

It certainly can. The point is, this would hurt China, not just the US. Hence, it's not a useful weapon for China to wield. They have many other better weapons against the US. Like IP theft and buying off countries.

Aircraft carriers and other military equipment also cost money. If China was seeking a more direct confrontation a financial attack might be the cheaper and safer option.

[JohnRawls]

Aircraft carriers and other military equipment also cost money. If China was seeking a more direct confrontation a financial attack might be the cheaper and safer option.

This notion always amused me. US, Europe and the rest of the "Western Bloc" countries like Japan, Australia and so on control the financial market, so any slugfest in the financial realm is doomed to fail not only because even Chinas financial market is miniscule compared to the "West" but also because China heavily relies on that investment for growth and without it, they would turn in to basically the stagnating version of Argentina but just in China.

This is like first shooting yourself in the leg and then shooting yourself in the head for the CCP.

[B0ycey]

I would say the impact of mass borrowing from Covid would have a greater impact to the US economy than who holds 4% of their debt. Besides, the liability of debt is who holds it, not who owes it. I once (and perhaps still believe) that if China sold off US debt all in one go it would create US inflation. But when I watch the amount of "new money" that is currently being handed out with no plan of drawing that back in, well if that doesn't create high inflation then perhaps the MMTs have it right after all. 2008 only made a blip on inflation figures during QE and perhaps that will occur again. I don't know. So I will be watching the next few years with interest. My instinct is this is going to come back and hurt us once everyone starts spending again due to excess cash in the system. But if I am wrong, then I don't see how China can sell $1tn in the bond market to create a negative US economic power play when the US have just quadrupled that amount and just plonked it into their economy with little effect since last year.

[AFAIK]

This is like first shooting yourself in the leg and then shooting yourself in the head for the CCP.

More so than an armed confrontation?
Prior to WWI many insisted that war would be too costly due to all the trade between European states.

[JohnRawls]

More so than an armed confrontation?
Prior to WWI many insisted that war would be too costly due to all the trade between European states.

Yes. China has a chance at winning a land war, CHina has no chance fighting a financial war while it is an export economy heavily dependant on international capital and Western investment.