Listening to pundits and headline writers, one would think that China owns the United States, or at least its debt. Press reports of the January visit of President Hu to DC and Chicago boosted a popular myth that the USA is so in debt to China that global power has shifted to the middle kingdom. Cartoons and pundits tell us that the US debt to China is so enormous that China has acquired great leverage over US foreign and commercial policy.
But what are the numbers? Quite different from the headlines. US Treasury Department figures paint the following general picture. Between 2002 and 2009, total US government debt grew from $4.4 trillion to $9.3 trillion. This does not count securities owned by the Federal Reserve or Social Security Administration (which if counted would make the percentages lower than the following). During this time, China bought a lot of US bonds – namely about 20% of this total growth of almost $5 trillion. But other foreign governments bought 40%, and the other 40% was purchased by US buyers.
In 2010 (through November 30), the US buyer percentage of new US debt issues rose to about 60%. China sold more US debt than it bought during this period, and other foreign countries or buyers in foreign countries bought the other 40%. This is not to suggest that Chinese holdings of US dollars are meaningless. The policy implications of large foreign holdings of US debt are important, but must include an understanding of the role of a reserve currency. The US dollar is the world’s principal reserve currency, and holding it is not simply a matter of leverage or good interest rates, but is virtually required by any country that wishes to finance trade and investment flows for its resident companies and people. Until and unless a world currency is created, independent of any one country’s central bank, “hard currency” debt from the USA, Japan, the Euro zone or elsewhere will play a role beyond simply debtor-creditor.
There is confusion amidst the numbers, as pointed out by Floyd Norris of the New York Times (“Data Shows Less Buying of U.S. Debt by China,” NY Times, Jan. 23, 2011, Business section – see blog at nytimes.com/Norris). This astute commentator points out that China may be buying or selling US treasuries through accounts of custodians in the UK or elsewhere. US Treasury Department numbers only track the source of purchases, not the identity of the purchaser. On this assumption, it will be easier for China (or any seller) to disguise foreign debt purchases and sales, and so to muffle what would otherwise become publicly debated foreign policy implications.
Britain is reported to have purchased $356 billion of US treasuries in the 12 months before November 30, 2010. But this itself can be misunderstood – as the Government of the UK did not buy this amount of US debt. Instead, the source of these purchases was from a UK address, and the actual purchasers include a wide variety of public and private individuals and entities.
The interrelationship of China and US trade and currency holdings is a great unfolding story. To picture it as “China holds all the cards” is as inaccurate as saying that global warming is a hoax because it’s snowing and frigid this late January day.