China National Debt

China is a rising power in the world these days. Any discussion of a China national debt problem is misplaced, but Chinese debt issues have much to do with the United States.

Chinese Debt?

Is there such a thing as a China national debt? No. Not even close. China is the world’s biggest creditor and is quickly converting into a pre-eminent economic power. It has done this by providing cheap labor and products to more expensive markets. Despite the huge numbers of its population, the top market for China is not its domestic consumer market. No, the top market is the good old United States.

China and U.S. Debt

China has the largest holdings of United States national debt of any country in the world. Most people know this, but are surprised to learn that Japan is a close second. As I write this in June of 2011, China holds about $900 billion per official numbers, but the total is thought to be significantly higher. Why the difference? China is known to buy treasury notes and dollar backed assets through third parties. All told, it is believed that China really owns between $1.4 and $1.9 trillion in notes. Any number in this range is significant.

Sword of Damocles?

Alarmists like to point to China’s holdings as a threat to the future of the United States. The basic idea is that China could destroy our economy by dumping all its debt holdings on to the market at once. Would this destroy us? Oh, yes. Of course, it would also nearly wipe out China as well. How so? Well, we are their biggest market. Can you name one country that would purposely destroy their biggest market? The Chinese economy would crash and they would be in as bad a shape as we would be. In short, don’t hold your breath on this threat.

Subtle Moves

What is clear is China is reconsidering whether it is such a smart idea to keep buying all this debt. The United States sells new treasury notes to refinance older notes that are coming due. For the last few years, China has been taking payment on its 30 year U.S. treasury notes, but only buying smaller term notes for the future. Also, it appears the country is just covering its current debt or buying slightly less instead of adding to its holdings. This would appear to be a major change on China’s part and could signal a slow move away from treasury notes. What effect that will ultimately have on the economic picture in the United States is anyone’s guess at this point.

Is there such a thing as a China national debt? No, but China does play a critical role in our debt picture. How that will play out in the future will probably be the story of the 21st century.

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