China's holdings of US Treasury debt sparks concern, but less than you may think : The Indicator from Planet Money China owns a LOT of Benjamins, greenbacks, whatever you like to call it, in the form of US treasury bonds. But it's been cutting back on some of those securities recently. So what would happen if Beijing decides to sell off all its holding of American debt, and is that the plan?

China's slice of the US debt pie

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And I'm Darian Woods. China used to be the biggest foreign owner of U.S. Treasury securities - but not anymore. Recently, China reduced its holdings of American government debt by more than 9% to less than $1,000,000,000,000. That's $981 billion, to be precise.

HIRSCH: Now, the amount of U.S. Treasuries outstanding is more than $30 trillion. So 981 billion isn't that much in comparison, but it is still a lot of money. And it's kind of a big deal when the country that used to be your biggest customer decides that it doesn't want to be your biggest customer anymore.

WOODS: So you don't have to look very far to find people who are worried about this. Some investors and pundits are concerned that there might be this future where the U.S. won't be able to find enough buyers for all the debt that it wants to sell, and the U.S. might have to price it higher in order to sell that debt. They might have to increase interest rates, in other words.

HIRSCH: And some people have even darker fears, like China wants to hurt America by dumping its debt and spooking the market, crashing the U.S. economy and maybe persuading all the other buyers of U.S. debt that it's not such a safe investment after all.

WOODS: Bleak. On today's show, we're going to look at China's holdings of U.S. Treasury debt, and we're going to find out just how big a deal it is that China's buying less of it. That's all coming up after the break.


HIRSCH: Nine hundred and eighty-one billion dollars - that's how much we owe the Chinese government right now. And it sounds like a lot. But how much is it really? I asked Quincy Krosby, the chief global strategist for LPL Financial.

QUINCY KROSBY: Their ownership now is down to - I want to say it's exactly 3.2% of outstanding treasuries.

WOODS: Three point two percent - I mean, that doesn't sound like very much.


WOODS: So that raises the question, who owns the rest?

KROSBY: Banks own treasuries. Insurance companies own treasuries - municipalities. It's individual pension funds. It's individual retirement accounts.

HIRSCH: Yeah. It turns out that by far the biggest buyers of the $30.7 trillion in U.S. national debt aren't foreign governments. They're us. Americans own roughly two-thirds of outstanding U.S. treasuries.

WOODS: The biggest owners are individual Americans who own treasuries, mostly indirectly through investment and retirement accounts, like Quincy says. But the government also owns a lot - like, trillions of it.

HIRSCH: Yeah. And this may sound a little weird. Like, we issue this debt, and then we buy it. But it's true. Social Security owns a big chunk - the Defense Department, too, and Medicare. The Federal Reserve owns more than $5 trillion worth. Why - because it's so safe.

WOODS: As for all that foreign ownership - well, most foreign governments actually own less than 1%. The big buyers are Japan with about 4% and China at 3.2. And China is a relative newcomer to the market.

HIRSCH: Yeah. Back in 2000, China owned just 60 billion of U.S. Treasuries, which is basically nothing. That was the beginning of China's expansion.

KROSBY: They ramped up their manufacturing. They ramped up their export machine. I mean, it reached the point where virtually everything that you bought seemed to be coming in from China.

WOODS: By selling into the U.S. market, Chinese companies were making billions of dollars. But those companies didn't want dollars. They wanted Chinese money that they could use within their own country, the yuan. So these companies asked the Chinese government to exchange it. And now the Chinese government had a lot of dollars.

HIRSCH: That was good in some ways. It helps to have foreign reserves, and China found it useful to hoard dollars as a way to keep its currency weak, which helped its exports. But it was bad in others. I mean, you need to put your money to work making more money, right? You can't just have it sitting around in sacks in your basement. So the Chinese government decided to buy U.S. Treasuries - lots of them.

KROSBY: You want to keep your currency where you're earning the currency, and you want it to be liquid. You want to be able to have access to the money anytime you want. And then the U.S. Treasury market allows that.

WOODS: That's why China has gobbled up so much U.S. debt over the last 20 years. It's actually good for their economy. But China has come a long way since the year 2000. The dollar used to be the only currency that China could do business in. But the yuan has become strong enough in its own right that it is now accepted by trading partners. In fact, the yuan was admitted into the International Monetary Fund's basket of five most trusted currencies in 2006.

HIRSCH: Yes. China's now, by some measures, the largest manufacturing economy in the world. It's becoming increasingly confident as a diplomatic power. And all of this means that maybe it doesn't need a weak currency and a huge stockpile of dollar reserves anymore.

WOODS: That's the sunny view of things. But the other view is a lot darker. In this scenario, China is weaponizing its holdings of U.S. debt. It's threatening to sell it all off in one go, possibly crashing the U.S. economy. And then China would refuse to buy any more ever. And this view, this scenario has gained traction as relations with China have gotten more tense over the last few years.

HIRSCH: Yeah. And concerns about this aren't without merit, right? I mean, the downward pressure on the U.S. Treasury market that would come with a large sale could well push interest rates up sharply. With the economy balanced on the knife edge of recession like it is right now, the timing would not be good. And trying to find buyers for $981 billion of U.S. Treasuries could be really tough, especially if the U.S. economy does go into a steep downturn.

WOODS: OK. You've got me a little scared here.

HIRSCH: OK. This is where I bring Quincy back in because she's on the sunny side with me. She says that Beijing selling all of its Treasury holdings is not out of the question, but it would likely not have the kind of apocalyptic effect that some people fear. I mean, for one thing, they couldn't sell everything all at once - right? - because they own such a wide range of securities.

KROSBY: When they buy, they - it's not necessarily just the 10-year treasury. So it's the, you know, full complement of the series.

WOODS: They buy four-week bills, two-year and 10-year notes, 20- and 30-year bonds - the whole enchilada.

HIRSCH: Yeah. And because of the way the market works, selling all of this would be really difficult and expensive if you try to do it all at once. It wouldn't be like dumping a truckload of whatever on someone's lawn. It'd be more like having a couple of guys tossing stuff out of the back of the truck as it drives up and down the street outside the house - still messy, but not quite as difficult to deal with.

KROSBY: I'm not suggesting there wouldn't be initially turmoil in the markets. Initially, the knee-jerk reaction in the market is that rates would go up, the U.S. dollar would probably weaken. But I think it would be calmed down very quickly.

WOODS: And why so calm? That's because there would still be a lot of buyers out there. Quincy says, we could possibly call around all of the friends of America at the various central banks around the world, and we could ask them to buy a few more billion here and there.

KROSBY: What's a trillion between France, the Bank of England and the Bank of Japan and the U.S.? It's nothing.

HIRSCH: And of course, if we were really desperate, we could just buy up the shortfall ourselves.

KROSBY: What would it take for the Fed to buy up everything? They've done it with quantitative easing a couple of times now. So the Fed could come in and buy. They could buy it all up, of course, with the understanding that, at some point, they would unwind their balance sheets, just as they are beginning to do now.

HIRSCH: Yeah. What Quincy is saying here is don't panic. I mean, even if the Chinese government does decide to sell everything off and never buy a single U.S. bond ever again, there may be some short-term disruption, but it won't last for long. She also says, by the way, that there is no sign that that is what's happening right now.

KROSBY: When you see the headlines, China dumps U.S. Treasuries - they haven't been doing that. They've just been scaling back. I would have to say it's been orderly.

WOODS: She says the trimming of this asset pool is just part of doing business for the Chinese, just like it is for the Japanese or every other central bank. They're always adjusting their holdings to manage the value of their currencies.

KROSBY: You don't hear or see headlines suggesting that Japan - still the No. 1 holder of U.S. Treasuries but certainly slowing their purchases - that there's any political agenda towards the U.S.

HIRSCH: Quincy says what's actually happening here is an inevitable rebalancing in the global economy as China becomes a bigger player. There's also an element of risk management as the world becomes more uncertain in the wake of Russia's war in Ukraine. What's not going on, Quincy says, is a weaponizing of Beijing's holding of U.S. debt.

WOODS: That's because, as it grows, China ties itself ever more tightly into a global economy that is still dominated by the U.S. and which is strongly influenced by the U.S. Treasury market. The interest rates on the debt that the U.S. issues influences the cost of goods and services across the globe. And if those interest rates move too far or fast, they can wreak havoc on entire economies, including China's.

HIRSCH: And all of this means that if the Chinese government does decide to swing a sword at America by dumping its treasuries and refusing to buy anymore, well, it could very easily end up cutting itself off at the knees.

WOODS: The show was produced by Corey Bridges with engineering from Josh Newell. It was fact-checked by Kathryn Yang. Viet Le is our senior producer, and Kate Concannon edits the show. THE INDICATOR is a production of NPR.

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