Explainer | US debt to China: how big is it and why is it important?

As of the end of November, China owned US$1.063 trillion of the total outstanding US government debt issued by the US Department of the Treasury.

Since the start of the trade war in 2018, there has been concern over China possibly weaponising its US debt holding as a way to retaliate against trade tariffs

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China does not disclose how much US debt it owns, but the US Treasury publishes monthly data on all foreign holders of US debt, and China has historically been among the top foreign holders of US debt along with Japan. Photo: Shutterstock

Published: 8:00pm, 3 Dec 2020Updated: 10:37am, 20 Jan 2021

What is the US government debt that China holds?

The amount of US debt held by China refers to securities such as bills, notes and bonds issued by the United States Department of the Treasury on behalf of the federal government to fund its annual budget deficit and roll over existing debt.

How much does the US owe China?

The Chinese government does not disclose how much US debt it owns, but the US Treasury publishes monthly data on all foreign holders of US debt, and China has historically been among the top foreign holders of US debt, along with Japan.

Foreign governments owned US$7.053 trillion of US debt in November, including China's US$1.063 trillion, and Japan's US$1.260 trillion, US Treasury data showed.

However, the US Treasury does warn that the data may not provide a “precise accounting of individual country ownership” of US Treasury securities, given that US securities can also be held in overseas custody accounts that may not be attributed to the actual owners. Market analysts have suspected for years that China uses securities firms in other countries to buy additional US debt.

Why does China buy US debt?

China has been running a large trade surplus in goods and services for years, meaning it exports more than it imports. As such, its international income has also increased from its growing trade surpluses, with many of the trade transactions with businesses in the US and other countries paid for with US dollars. Thus, China accumulates US dollars, which it uses to buy assets denominated in US dollars – such as Treasuries – as well as assets in other currencies. These assets are included in its foreign exchange reserves, which are now the largest in the world at US$3.22 trillion.

China manages its foreign exchange reserves by investing in different assets that offer safety and stability so it can use the reserves to counter volatility in fund flows and to stabilise its economy during a financial crisis.

China also keeps a tight grip on the yuan exchange rate with the US dollar to keep exports competitive, such as by strictly controlling money flowing into and out of China.

China continues to run a trade surplus with the US, which helps the former maintain employment levels and keep its economy going.