THE NEW RED SCARE: CHINESE OWNERSHIP OF U.S. DEBTInvesting
Would it surprise you to hear that China owns only about 7% of the total outstanding debt of the U.S. Government?¹
This still amounts to about $1.26 trillion, but China’s ownership of Treasury securities is well behind two major domestic owners—Social Security and the Federal Reserve.²
Nevertheless, the emergence of a political and economic competitor on the world stage as a major owner of U.S. debt has unsettled some policymakers and citizens alike.
The Anatomy of Ownership
Chinese ownership of U.S. debt is primarily due to its exchange-rate policy, which fixes the value of its currency to the U.S. dollar at a rate that is lower than if it were freely traded in the marketplace.
To maintain this favorable exchange rate, China uses its currency to buy dollars, which must then be invested in dollar-denominated assets. It chooses to funnel them into Treasuries to keep its assets liquid and avoid the political objections that may follow the purchase of high profile U.S. assets, such as stocks or real estate.³
Is There a Danger?
This favorable exchange rate helps to promote Chinese exports. While low-cost Chinese products benefit American consumers, a major criticism of China’s currency policy is that low-cost exports have the potential to take away American jobs. This concern has abated somewhat due to the repatriation of manufacturing, spurred by new sources of cheaper domestic energy made available through fracking technology.
The dilemma with the U.S. desire for a stronger Chinese currency lies in the potential of higher interest costs on U.S. debt, should the Chinese pare their purchases.
Chinese ownership may actually be more of a straight jacket for China than a means of leverage. Should China seek to unload its holdings, the move could drive Treasury prices down, hurting its own financial interests.
As J. Paul Getty once observed, “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”⁴
- Treasury.gov, January 16, 2015
- Treasury.gov, January 19, 2016. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury security prior to maturity, it could be worth more or less than the original price paid.
- The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Real estate property values can be significantly affected by economic downturns or changes in real estate pricing.
- BrainyQuote, January 2015.
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