That “China owns the U.S. National Debt” has become an universal knowledge for American people, being taught from the lower school to the university. How does this debt relationship work? Will America ever pay off its debt? Why is China willing to keep borrowing to the United States?
The U.S. National debt exceeded $20 trillion on September 8, 2017, surpassing the American gross GDP. Based on the data as of May 2017, China has cut its American foreign debt holding to $1.102 trillion, no longer holding the largest portion. With $1.111 trillion, Japan now has become the No.1 U.S. debt holding country.
Owning U.S. Treasury notes benefits China by increasing the demand of U.S. dollar and so decreasing the value of RMB (as the Dollar-to-Yuan conversion increases) . Thus. Chinese exports are cheaper than those of America. Consequently, Chinese cheap exports gain global market and produce more jobs opportunity for Chinese people. The strategy of devaluing RMB led Chinese economy to grow 10 percent annually for the past three decades. On the other side, American people can enjoy lower consuming prices and lower interest rates. American economy also grows.
Will America ever pay off its debt to China? Probably never. There are three paths for America to pay back its debt: cutting spending, raising taxes, and boosting GDP. Unfortunately, there is not much in American budget to cut to save $1.102 trillion. It would terminate any politician’s career to raise tax for paying off Chinese debt. Boosting GDP is far more difficult to execute than to say.
However, such double-win situation might not last longer. Since the Chinese government purposefully decreases the value of RMB, the Chinese businessmen are hurt by the interest rate. They start to take loans in dollars or invest outside, leaving cash flowing out of China. Moreover, the Chinese government has asserts its voice in the global market through this low-value RMB process. The Chinese government ambitiously aims to replace RMB to Dollars as the global reserve. On November 30, 2015, the International Monetary Fund awarded the RMB status as a reserve currency. The IMF added the RMB to its Special Drawing Rights basket on Oct 1, 2016. At last, that the American government allows the value of dollar to drop made the debt China holds less valuable.
As China begins to sell parts of debt out, the situation is shifting to a double-lose. American interest rate would rise, and the economic growth slows. The Chinese exports also loses competitiveness.
The anxiety is not necessary. China would not sell all or large amount of U.S. debt at one time because it will drastically devalue dollars and ruin the international market. The American and Chinese economy will still be bonded together through this tremendous debt for a long time.