Why does us owe china

Editions Quartz. More from Quartz About Quartz. Follow Quartz. These are some of our most ambitious editorial projects. From our Obsession. China is striving for global leadership, and has the economic clout to realize its vision. By Annabelle Timsit Geopolitics reporter. What is US debt and why do other countries own it?

Sign me up. Update your browser for the best experience. China is also responding to accusations of manipulation. Most countries want their currency values to fall so they can win global currency wars. Countries with lower currency values export more since their products cost less when sold in foreign countries.

The Chinese government uses U. It receives these dollars from Chinese companies that receive them as payments for their exports. It allows the U. Treasury to borrow more at low rates. Congress can then increase the federal spending that spurs U.

Owning U. Treasury notes helps China's economy grow. Demand for dollar-denominated bonds raises the dollar value compared to that of the yuan. That makes Chinese exports cheaper than American-made goods, increasing sales. China's position as the largest foreign holder of U. It is responsible for lower interest rates and cheap consumer goods. If it called in its debt, U. On the other hand, if China called in its debt, the demand for the dollar could plummet. This dollar collapse could disrupt international markets even more than the financial crisis.

China's economy would suffer along with everyone else's. If China ever did call in its debt, it slowly would begin selling off its Treasury holdings. Even at a slow pace, dollar demand would drop. At some price point, U. China could start this process only after it further expanded its exports to other Asian countries and increased domestic demand. China's low-cost competitive strategy seems to be working. In , it grew at 6. China has become one of the largest economies in the world. China also became the world's biggest exporter in China needs this growth to raise its low standard of living.

An excess supply of U. It would increase the cost of Chinese products, making them lose their competitive price advantage. China may not be willing to do that, as it makes little economic sense. If China or any other nation having a trade surplus with the U. Treasurys or even starts dumping its U. The ongoing worries about China's increased holding of U. Treasurys or the fear of Beijing dumping them are uncalled for. Even if such a thing were to happen, the dollars and debt securities would not vanish.

They would reach other vaults. Although this ongoing activity has led to China becoming a creditor to the U. Considering the consequences that China would suffer from selling off its U. Even if China were to proceed with the selling of these reserves, the U. It can also take other measures like Quantitative Easing QE.

Although printing dollars would reduce the value of its currency, thereby increasing inflation, it would actually work in favor of U. Real repayment value will fall proportionately to the inflation—something good for the debtor U. Although the U. Effectively, the U. China, on the other hand, needs to be concerned about loaning money to a nation that also has the limitless authority to print it in any amount.

High inflation in the U. Willingly or unwillingly, China will have to continue to purchase U. Geopolitical realities and economic dependencies often lead to interesting situations in the global arena. China's continuous purchase of U. It continues to raise concerns about the U. The reality, however, is not as bleak as it may seem, for this type of economic arrangement is actually a win-win for both nations.

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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Bonds Treasury Bonds. Table of Contents Expand. Chinese Economics. Self-Correcting Currency Flow. China's Need for a Weak Renminbi. Impact of China Buying U. USD as a Reserve Currency. Risk Perspective for U. Risk Perspective for China. The Bottom Line. Key Takeaways China invests heavily in U.

Treasury bonds to keep its export prices lower.