Why does us owe china money

Treasuries represent a convenient, liquid, low-risk store of value. These qualities make it attractive to diverse financial actors, from central banks looking to hold money in reserve to private investors seeking a low-risk asset in a portfolio. Of all U. Treasury securities. The secretary of the treasury is legally required to invest Social Security tax revenues in U.

The Federal Reserve holds the second-largest share of U. Treasuries, about 13 percent of total U. Treasury bills. Why would a country buy its own debt?

As the U. The central bank performs this function via open market operations—buying and selling financial assets, like Treasury bills, to add or remove money from the economy. By buying assets from banks, the Federal Reserve places new money in circulation in order to allow banks to lend more, spur business, and help economic recovery. These financial actors include state and local governments, mutual funds, insurance companies, public and private pensions, and U.

Generally speaking, they will hold U. Treasury securities as a low-risk asset. The biggest effect of a broad scale dump of US Treasuries by China would be that China would actually export fewer goods to the United States.

Overall, foreign countries each make up a relatively small proportion of U. So it can use its reserve of US dollars to buy Treasurys. China can also use its foreign exchange reserves to influence the value of its currency. Yes, that is a lot—the most in the world , in nominal terms.

Most of it is owned by domestic actors, either consumers, banks, or institutions like the Federal Reserve. First, it could sell its Treasurys. China could also let its US Treasurys mature and not renew them. But the US constantly issues new bonds before the old ones mature to refinance its debt.

He promises to level the playing field on trade by imposing a 45 percent tariff on all Chinese goods. About that sovereign debt. Investors watch price movements on screens at a securities company in Beijing on February 22, US Treasuries are considered one of the safest investments in the world because, with little exception, the US Treasury does not default on its debt. Countries like China are willing to lend the US the money, so that we continue to buy all those imports. It would increase the cost of Chinese products, making them lose their competitive price advantage.

China may not be willing to do that, as it makes little economic sense. If China or any other nation having a trade surplus with the U. Treasurys or even starts dumping its U. The ongoing worries about China's increased holding of U. Treasurys or the fear of Beijing dumping them are uncalled for. Even if such a thing were to happen, the dollars and debt securities would not vanish. They would reach other vaults.

Although this ongoing activity has led to China becoming a creditor to the U. Considering the consequences that China would suffer from selling off its U. Even if China were to proceed with the selling of these reserves, the U. It can also take other measures like Quantitative Easing QE. Although printing dollars would reduce the value of its currency, thereby increasing inflation, it would actually work in favor of U.

Real repayment value will fall proportionately to the inflation—something good for the debtor U. Although the U. Effectively, the U. China, on the other hand, needs to be concerned about loaning money to a nation that also has the limitless authority to print it in any amount. High inflation in the U. Willingly or unwillingly, China will have to continue to purchase U. Geopolitical realities and economic dependencies often lead to interesting situations in the global arena.

China's continuous purchase of U. It continues to raise concerns about the U. The reality, however, is not as bleak as it may seem, for this type of economic arrangement is actually a win-win for both nations.

Treasury Direct. United States Census Bureau. Federal Reserve of St. Accessed Aug. National Bureau of Economic Research.

Fiscal Policy. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance.

Your Practice. Popular Courses.