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.