China’s Holdings of U.S. Government Debt Have Declined Since 2013

By Terence P. Jeffrey | March 19, 2015 | 11:28am EDT

President Barack Obama with Chinese leader Xi Jinping in Beijing in November 2014. (AP Photo)

( - The Japanese, who increased their holdings of U.S. government debt from $1,201,400,000,000 to $1,238,600,000,000 in the year between January 2014 and January 2015, are poised to surpass the Mainland Chinese as the top foreign owners of U.S. government debt.

In contrast to the Japanese, the Mainland Chinese decreased their holdings of U.S. government debt from $1,275,600,000,000 to $1,239,100,000,000 during the same period, according to data released by the U.S. Treasury this week.

That leaves the Chinese and the Japanese neck-to-neck in their ownership of U.S. debt--$1.2391 trillion to $1.2386 trillion--with the Japanese on a generally upward trend in their holdings and the Chinese on a generally downward trend.

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From March 2000 (which is the earliest date for which the Treasury's website has published historical data on foreign-owned debt) through August 2008, entities in Japan owned more U.S. government debt than entities in Mainland China. In September 2008, entities in Mainland China surpassed entities in Japan in ownership of U.S. debt and since then (through the latest published data, which for this January), the Chinese have been the top foreign owners of U.S. government debt.

Yet, thus far, the peak for Mainland Chinese holdings of U.S. debt was in November 2013, when Mainland Chinese holdings hit $1,316,700,000,000. Since then, Mainland Chinese ownership of U.S. debt has trended generally downward, while Japanese holdings have trended generally upward. (Entities in Hong Kong, which the Treasury accounts separately from entities in Mainland China, also held $172 billion in U.S. government debt as of the end of January.)

As the U.S. government massively increased its debt over that past fifteen years, the Federal Reserve and foreign entities—including the governments of China and Japan—have purchased unprecedented quantities of U.S. Treasury securities.

In recent years, the Treasury has been able to sell these securities at relatively low interest rates. Thus, the Treasury has been able to keep the interest paid on the publicly held portion of the debt relatively low.

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In January 2001, for example, entities in Mainland China owned only $61.5 billion in U.S. government debt and entities in Japan owned only $312.5 billion—for a combined $374 billion in U.S. debt owned by China and Japan. But in January 2001, the average interest rate paid on the marketable debt of the U.S. government was 6.620 percent, according to the Treasury.

By January 2015, the $1.2386 trillion owned by the Japanese and the $1.2391 owned by the Chinese equaled a combined total of $2.4777 trillion. But in January 2015, that average interest rate on the U.S. government's marketable debt was only 2.029 percent—less than one-third what it was the month that George W. Bush took office.

Also back at the end of January 2001, according to its weekly balance sheet, the Federal Reserve owned $518.441 billion in U.S. government securities. Eight years later, at the end of January 2009, the Federal Reserve still owned only $475.129 billion in U.S. Treasury securities. But by January 2010, the Fed owned 776.595 billion in U.S. Treasury securities; and, by the end of January 2015, it owned $2.4608 trillion.

In total, according to data the Treasury released this week, foreign entities owned $6.2179 trillion in U.S. debt as of the end of January. Of that, $4.1243 trillion was owned by “foreign official institutions”—that is, foreign government-controlled institutions.

The $6.3675 trillion in U.S. debt owned that foreign-government institutions and the Federal Reserve owned combined as of the end of January equaled 49 percent of all the publicly held debt issued by the United States up to that point. The $8.4622 trillion in U.S. debt owned by all foreign entities and the Federal Reserve combined as of the end of January equaled 65 percent of all the publicly held debt issued by the United States up to that point.

In addition to the money the Treasury has borrowed publicly—from sources including China and Japan—it has also borrowed money from government trust funds (such as the Social Security trust funds). The Treasury calls this debt “intragovernmental debt.”

Over time, however, the share of the federal debt held by the public has been increasing as the share held in “intragovernmental debt” has shrunk. As the Baby Boom continues to retire and collect Social Security benefits, the share of the debt that is “intragovernmental” will continue to shrink, and the share on which the Treasury must pay interest to public debtholders will increase.

At the end of January 2001, the total debt of the U.S. government was $5,716,071,000,000. Of that, $3,388,016,000,000—or 59.3 percent—was held by the public; and $2,328,055,000,000—or 40.7 percent—was “intragovernmental debt.”

By the end of January 2015, the total debt of the U.S. government had grown to $18,082,294,000,000. Of that debt, $12,984,930,000—or 71.8 percent—was held by the public, and $5,097,364,000,000—or 28.2 percent—was “intragovernmental debt.”

In a paper published last week—“China-U.S. Trade Issues"—the Congressional Research Service said: “China’s purchases of U.S. government debt help keep U.S. interest rates low.”

“However,” said this CRS report, “over the past few years, Chinese officials have expressed concern over the 'safety' of their large holdings of U.S. debt. They worry that growing U.S. government debt and expansive monetary policies will eventually spark inflation in the United States, resulting in a sharp depreciation of the dollar. This would diminish the value of China’s dollar asset holdings. Some Chinese officials have called for replacing the dollar as the world’s major reserve currency with some other currency arrangement, such as through the International Monetary Fund’s special drawing rights system, although many economists question whether this would be a feasible alternative in the short run.”

“Some analysts have raised concerns that China’s large holdings of U.S. debt securities could give China leverage over U.S. foreign policy, including trade policy,” said the CRS report. “They argue, for example, that China might attempt to sell (or threaten to sell) a large share of its U.S. debt securities as punishment over a policy dispute, which could damage the U.S. economy."

"Others counter that China’s holdings of U.S. debt give it very little practical leverage over the United States," said the CRS report. "They argue that, given China’s economic dependency on a stable and growing U.S. economy, and its substantial holdings of U.S. securities, any attempt to try to sell a large share of those holdings would likely damage both the U.S. and Chinese economies. Such a move could also cause the U.S. dollar to sharply depreciate against global currencies, which could reduce the value of China’s remaining holdings of U.S. dollar assets.”

In its long-term budget outlook published last July, the Congressional Budget Office asked: “What Consequences Would a Large and Growing Federal Debt Have?”

“How long the nation could sustain such growth in federal debt is impossible to predict with any confidence,” said CBO. “At some point, investors would begin to doubt the government’s willingness or ability to pay its debt obligations, which would require the government to pay much higher interest costs to borrow money. Such a fiscal crisis would present policymakers with extremely difficult choices and would probably have a substantial negative impact on the country. Even before that point was reached, the high and rising amount of federal debt that CBO projects under the extended baseline would have significant negative consequences for both the economy and the federal budget.”

In its latest budget outlook, published in January, the CBO said "the federal government is projected to borrow another $8.8 trillion
from 2015 through 2025."

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