The Truth About China’s Debt to America: It’s Complicated and Surprising

Ever wondered about the financial relationship between the world’s two biggest economic powers? The question “how much does China owe to us” might seem straightforward, but the answer is anything but simple. As I dug into this topic, I discovered layers of complexity that rarely make headlines.

The Surprising Reality: China Owes America Over $1 Trillion

When most people think about US-China debt, they usually imagine America owing China money. But did you know the reverse situation exists too? According to recent research, China owes American bondholders approximately $1 trillion.

That’s right – while China holds about $859.4 billion in US Treasury securities (about 2.6% of total US debt), the communist nation actually owes American investors a comparable amount.

How did this happen?

This debt dates back to bonds issued by China before the Communist revolution in 1949. When the Communist Party took power, they defaulted on these obligations and have refused to honor them ever since.

These bonds include

• Railroad bonds
• Government reorganization bonds
• Bonds issued by the pre-communist Chinese government

The Current US-China Financial Relationship

To understand the full picture, we need to look at both sides of the equation:

This creates an interesting situation where both countries technically owe each other large sums of money.

China’s US Debt Holdings: Not What You Might Think

Despite common perceptions, China is actually not the largest foreign holder of US debt. That title belongs to Japan, which holds approximately $1.1 trillion in US Treasuries (about 3% of total US debt).

Here’s how the top foreign holders of US debt stack up:

1. Japan: $1.1 trillion (3%)
2. China: $859.4 billion (2.6%)
3. United Kingdom: $668.3 billion
4. Belgium: $331.1 billion
5. Luxembourg: $318.2 billion

It’s worth noting that China and Japan’s holdings have decreased by 17% and 15% respectively from January 2022 to January 2023.

Why China Buys US Debt in the First Place

You might be wondering why China buys so much US debt. There are two main economic reasons:

1. Currency Pegging: China wants to keep the yuan pegged to the US dollar. This practice has been common since the Bretton Woods Conference in 1944.

2. Export Advantages: A dollar-pegged yuan helps keep Chinese exports cheaper in international markets, which boosts their economy.

As I see it, this arrangement creates a sort of financial interdependence. China needs stable US markets to buy their goods, and they use US Treasury securities as a way to manage their currency and maintain their export advantage.

The Defaulted Chinese Debt: A Hidden Story

Now, let’s talk about the money China technically owes to American bondholders. This lesser-known debt comes from bonds issued by previous Chinese governments that the current Communist regime has refused to honor.

Some key facts about these defaulted bonds:

• They were issued by legitimate Chinese governments before 1949
• Many western countries including Britain have successfully negotiated settlements for similar bonds
• The US government has not aggressively pursued collection of these debts
• Some estimates value the current worth at over $1 trillion with accumulated interest

Legal Battles and Potential Solutions

American bondholders haven’t given up on collecting these debts. Various legal efforts have been made over the decades:

• In 2019, the American Bondholders Foundation presented their case to the Trump administration
• Some have suggested using these bonds to offset the US debt owed to China
• The British government successfully negotiated a settlement for their citizens’ bonds in 1987

One interesting possibility is using these defaulted bonds as leverage in trade negotiations or debt discussions with China. As one bondholder put it: “They want us to honor our debts, but they won’t honor theirs.”

What This Means for US-China Relations

The mutual debt situation creates an unusual dynamic between the two nations:

1. Trade Leverage: The defaulted Chinese bonds could potentially be used as negotiating chips in trade talks.

2. Financial Interdependence: China can’t simply “call in” all US debt at once, as it would hurt their own economy and currency stability.

3. Symbolic Importance: The refusal to honor historical debts represents a broader pattern of selective compliance with international financial norms.

As I analyze this situation, it’s clear that both countries have financial leverage over each other, creating a kind of economic MAD (Mutually Assured Destruction) scenario where extreme actions would harm both sides.

Could China Actually Call In America’s Debt?

A common fear is that China could suddenly demand payment of all US debt they hold. However, this isn’t really possible for several reasons:

1. Treasury securities have different maturity dates, so they can’t all be redeemed simultaneously
2. Suddenly selling off US debt would crash the value of China’s remaining holdings
3. It would strengthen the yuan against the dollar, making Chinese exports more expensive
4. The Federal Reserve owns six times more US debt than China does and could step in

In other words, China is just as dependent on the US economy as America is on continued Chinese investment.

The Impact on Regular Americans

You might wonder how all this impacts everyday Americans. Here’s the reality:

• The US-China financial relationship helps keep interest rates lower
• It provides cheaper consumer goods through trade
• It creates complex geopolitical dynamics that affect everything from jobs to foreign policy
• The defaulted Chinese bonds represent lost investments for many American families

What Might Happen in the Future?

Looking ahead, several scenarios could play out:

1. Status Quo: Both sides continue to maintain the current financial relationship, with minor adjustments based on economic conditions.

2. Negotiated Settlement: China could eventually agree to some form of settlement on the defaulted bonds, perhaps as part of broader trade negotiations.

3. Gradual Unwinding: China might continue to slowly reduce its holdings of US debt, as it’s been doing in recent years.

4. Legal Resolution: US courts or international tribunals could force action on the defaulted bonds.

As one expert noted: “The most likely outcome is a continued slow evolution rather than any dramatic change. Neither side wants to disrupt the global financial system.”

Key Takeaways About China’s Debt to the US

After researching this complex topic, here are the main points I think everyone should understand:

• China owes American bondholders approximately $1 trillion from defaulted pre-1949 bonds
• China holds about $859.4 billion in US government debt (2.6% of total)
• Japan, not China, is the largest foreign holder of US debt
• The financial relationship creates mutual dependence rather than one-sided vulnerability
• Both historical claims and current holdings create a complex web of financial relationships

The Bottom Line

The question “how much does China owe to us” has a surprising answer: potentially more than we owe them, if historical defaulted bonds are included in the calculation.

This reveals a more nuanced financial relationship than many realize. While media attention often focuses on America’s debt to China, the reverse obligation receives far less coverage despite its similar magnitude.

Understanding this two-way financial street helps provide context for trade negotiations, international relations, and economic policies between the world’s two largest economies.

What do you think about this complex financial relationship? Do you believe the US should more aggressively pursue collection of the defaulted Chinese bonds? Or is maintaining the current balance more important for global economic stability?

I’d love to hear your thoughts in the comments below!

Japan owes the United States the most money, holding over

$\$1$

trillion in U.S. debt.

The $36 trillion U.S. debt is owed to a variety of domestic and foreign entities, not to a single source. About $29 trillion is held by the public and includes holdings by domestic investors like banks, pension funds, and individuals, as well as foreign governments and investors like Japan and China, and the Federal Reserve. The remaining $7 trillion is “intragovernmental debt,” owed to U.S. government accounts such as the Social Security and Medicare trust funds.

China’s debt is primarily held by domestic entities, with state-owned banks and other Chinese financial institutions like insurance companies being the largest holders. Local governments, through their own borrowing and state-owned financing vehicles, also hold a significant amount of debt, which is ultimately a government liability.