China Unloads Some U.S. Debt

In recent months, China has cut back on its stockpile of U.S. government debt. China is now the second-largest holder of U.S. Treasuries, behind Japan.

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MELISSA BLOCK, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

ROBERT SIEGEL, host:

And I'm Robert Siegel.

The Treasury has revealed that for the first time in a year and half, China is no longer the United States' leading creditor. The U.S. government now owes more money to Japan than to any other country. This comes amid word that some credit rating agencies are considering downgrading the U.S. and Japan; a shocking move that would represent a warning that both these countries' fiscal health has diminished.

Adam Davidson of NPR's Planet Money has been studying this issue and he joins us now.

Hi, Adam.

ADAM DAVIDSON: Hey, Robert.

SIEGEL: What does it mean that Japan now owns more U.S. debt than China does?

DAVIDSON: It seems to be a temporary phenomenon. One thing I just want to note quickly is you might think that the U.S. government would know exactly who it owes money to and how much it owes. I mean, I certainly know who I owe money to. But it doesn't work that way with government debt because the way the U.S. borrows money is that it issues Treasury bonds and anyone can buy those Treasury bonds.

Sometimes governments like China buy them secretly, through middlemen. And the U.S. government really has to kind of guess who they owe money to, and that's the case here. So these numbers are a bit rough; no one knows for sure. But it seems that Japan took a short term bet on the U.S. Treasury market in the last few months of last year. But China has done something more upsetting. China has fundamentally decided to lower the extent to which it is exposed to U.S. debt.

So we are seeing, really, in the long term, the global appetite for lending money to the U.S. go down.

SIEGEL: Well, if that happens and if Japan is not interested in becoming a much bigger creditor to the U.S., does that mean there's a danger that the U.S. won't be able to borrow money at precisely the time that we've got a bigger deficit and we need to finance it?

DAVIDSON: That is the issue. That is the fear. And it's somewhere between cause for concern and cause for real panic. You know, just like you, if you got yourself into a lot of debt, if your salary went down, credit card companies would be a little less excited to lend you money. And they might lend you the same amount but at much higher interest rates. And that seems to be what is likely to happen.

The U.S. will be able to borrow, but it'll borrow at higher rates. And just like us with our credit cards, when we borrow at higher rates, we have to pay more every year and that makes it even harder for us to get out of the hole. And it does seem like that's a fundamental shift that is likely to play out in the coming years.

SIEGEL: Now, when we do that, the credit card company usually likes it. Put us in China's position here. Why are they thinking of lending us less money?

DAVIDSON: As a general rule, China has not lent to the U.S. to make money as a good investment. As a general rule, the U.S. pays the least interest rates of anything in the world. So, almost any other country or company that you could lend money to, you'd make more money off of.

Generally, China has lent money to the U.S. to keep its currency pegged to the U.S. dollar and for a variety of other political reasons. China has had a lot of fun over the last few months sort of lecturing the U.S. and telling us: Hey, you guys got yourselves and you got the whole world into this horrible financial disaster. We don't trust you to manage your fiscal health, and we don't see you as much a safe bet anymore. We want to expand who we lend money to.

And China isn't alone in this. I mean, we see similar things coming out of Japan, coming out of Europe, coming out of the oil-rich states around the world that have the cash that they could potentially lend to us.

SIEGEL: Well, given the hundreds of billions of dollars in U.S. debt that China and Japan each hold, does it give it much influence over Washington?

DAVIDSON: Here's the issue: We owe so much money to China and to Japan, that if our health truly diminished, then their health would diminish. So much of the Chinese and Japanese governments' wealth is basically tied up with the U.S. economy. So it's really sort of a mutually assured financial destruction. They can pressure us, sure. But they can't really punish us because to punish us would mean to punish themselves far more.

SIEGEL: At last, American taxpayers can say: We are too big to fail.

DAVIDSON: That's exactly right.

SIEGEL: Adam Davidson of NPR's Planet Money. Thanks, Adam.

DAVIDSON: Thank you, Robert.

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