What To Make Of U.S.'s Debt To China

It's understandable when Americans get alarmed by the $1.2 trillion in U.S. debt held by China. But there's another way to look at the situation: That $1.2 trillion is a huge part of China's wealth. China can't turn its back on the U.S. any more than we can walk away from China. Call it economic mutually assured destruction.

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The U.S. owes China a lot more money than we previously thought. The U.S. Treasury has published new figures showing that China now owns nearly $1.2 trillion in U.S. government bonds. Adam Davidson with NPR's Planet Money team explains what this means.

ADAM DAVIDSON: There are a couple of ways to think about the U.S. owing China $1.2 trillion. I'm going to start with the scary way. China could use their power as our creditor to wreak havoc on our economy. If China were to, say, sell off 10 or 15 percent of its U.S. Treasury bonds, that could be enough to send interest rates skyrocketing. That would destroy our fragile economic recovery. It will be painful for years. Just threatening to start switching their holdings away from dollars could send terror throughout the global economy. It's not hard to think, my goodness, China owns us.

But let's look at that debt another way. To the U.S., $1.2 trillion is 8 percent of our debt. That's a lot of money. But look at that same $1.2 trillion from China's perspective. It's close to half of their government's savings. It's more than 20 percent of the entire Chinese economy. One point two trillion dollars is just a lot more money to China than it is to the U.S. And that means that the only way China can hurt us is to completely destroy their own economy. China needs the U.S. and the U.S. dollar to stay healthy, to keep growing. What we have is mutually assured economic destruction.

Now, that might not be the most comforting phrase, but to those worried about China's rise, it should be a relief to know that - for now, at least - the only way they can do well is if we do well too.

Adam Davidson, NPR News.

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