The US Foreign Debt Pile of $31Tln, and who owns it?!

Currently, the amount of national debt owed by America to foreign investors is $7.3Tln, mostly in the form of Treasury securities. Central banks hold US treasuries as foreign exchange reserves, while private investors view them as a safe haven due to their low default risk. Foreign investors may also purchase Treasuries as a store of value or as collateral during international trade transactions. Countries can use them to manage exchange rate policy and protect their currency’s exchange rate from speculation.


Japan holds the largest amount of U.S. debt among foreign investors, with $1.1Tln in Treasury holdings. The United Kingdom is the third-highest holder at over $655Bln, followed by 13 notable holders in Europe and 11 in the Asia-Pacific region. Surprisingly, small nations like the Cayman Islands, Bermuda, Bahamas, and Luxembourg, with a combined population of just 1.2m people, own a significant amount of Treasuries at $741Bln.

In 2019, Japan surpassed China as the top holder of U.S. debt, as China shed over $250Bln or 30% of its holdings in four years. China’s bond offloading was a way to manage the yuan’s exchange rate. It sells dollars to buy yuan when the currency falls, but it also uses a basket of currencies to manage its currency.

Foreign demand for Treasuries fell by 6% in 2022 due to higher interest rates and a strong U.S. dollar, which made owning these bonds less profitable. Rising interest rates on U.S. debt lower the present value of their future income payments and cause their prices to fall. This drop in demand is a sharp reversal from 2018-2020, when demand surged due to historic low interest rates. After the 2008-09 financial crisis, U.S. debt holdings effectively tripled from $2 to $6Tln over a decade.


The surge in China’s ownership of US Treasuries, from $100Bln in 2002 to a peak of $1.3Tln in 2013, was driven by its need to sell yuan and buy dollars to ease exchange rate pressure on its currency. Today, global interest-rate uncertainty, which affects currency valuations and demand for Treasuries, continues to impact the future direction of foreign US debt holdings. Concerns over China’s ownership of American debt are based on a misunderstanding of sovereign debt and its impact on economic relations between countries. Buying sovereign debt is a normal transaction that helps maintain openness in the global economy. China’s stake in US debt has a binding effect on bilateral relations, rather than a dividing one.

Even if China wanted to use its loans as a coercive measure, it is complicated and often heavily constrained. A creditor can only dictate terms for a debtor country if that debtor has no other options. However, American debt is a widely-held and highly desirable asset in the global economy, and whatever debt China sells is easily purchased by other countries. In August 2015, when China reduced its holdings of US Treasuries by approximately $180Bln, the selloff did not significantly affect the US economy, limiting the impact that such an action may have on US decision-making.

Moreover, China needs to maintain significant reserves of US debt to manage the exchange rate of the renminbi. If China suddenly unloads its reserve holdings, its currency’s exchange rate would rise, making Chinese exports more expensive in foreign markets. Therefore, China’s holdings of American debt do not provide undue economic influence over the United States.

Countries accumulate foreign exchange reserves for several reasons. Any country that trades openly with other countries is likely to buy foreign sovereign debt to pursue its economic objectives. Countries can have any two but not three of the following: a fixed exchange rate, an independent monetary policy, and free capital flows. Foreign sovereign debt provides countries with a means to maintain the exchange rate or forestall economic instability. It is also a low-risk store of value, making it attractive to central banks and other financial actors alike. Many countries keep foreign currency in reserve to pay for expenses related to international trade and investments abroad, which cushions the economy from sudden changes in international investment.

There are two key reasons why China buys U.S. debt, which are similar to other countries. Firstly, the 1997 Asian Financial Crisis prompted Asian economies, including China, to build up foreign exchange reserves as a safety net. China has accumulated large reserves due to persistent surpluses in the current account, which help to prevent destabilization of the domestic economy from cash inflows from trade and investment. Secondly, U.S. debt is an attractive asset for countries, as it is safe and convenient, and the U.S. dollar is extensively used in international transactions as the world’s reserve currency. This means that trade goods are priced in dollars, and the dollar can be easily converted to cash due to its high demand. Additionally, the U.S. government has never defaulted on its debt. China’s large holdings of U.S. Treasury bonds also reflect the U.S.’s power in the global economy.

China purchases U.S. debt for its complex financial system to prevent inflation caused by cash inflows. This is unusual for a country like China, which typically saves more than it invests domestically and is considered an international lender. To prevent inflation, the CCB uses a process called “sterilization” to remove incoming foreign currency by purchasing foreign assets, such as U.S. Treasury bonds. However, this system generates low returns on investment and forces Chinese firms to borrow from abroad at high interest rates while China lends to foreign entities at low interest rates. This ultimately leads to China purchasing foreign assets, including safe and convenient U.S. debt.

Although U.S. debt is an attractive asset, economists remain concerned about continued U.S. debt financing. A sudden halt in capital flows to the United States could trigger a domestic crisis. The issue is not limited to China’s demand for U.S. debt, but rather the dependence on debt financing from all financial actors.

From a regional perspective, Asian countries hold an unusually large amount of U.S. debt due to the 1997 Asian Financial Crisis. The crisis led to a crash in incoming investments for countries such as Indonesia, Korea, Malaysia, the Philippines, and Thailand. This amounted to an estimated -$12.1Bln, or 11% of their combined pre-crisis GDP. In response, China, Japan, Korea, and Southeast Asian nations have established large precautionary funds of foreign exchange reserves, including U.S. debt, for safety and convenience. These policies were proven effective in the post-2008 period when Asian economies recovered relatively quickly.


Foreign countries hold a relatively small portion of U.S. debt, with China’s holdings representing just under 20% of foreign-owned U.S. debt in recent years, and between 5-7% of total U.S. debt.

The Bank of Japan’s decision to allow government-bond yields to fluctuate within a half-percentage-point band instead of a quarter-point band caused the yen to soar against the dollar and high-rated sovereign and corporate bonds to sell off hard. This could lead Japanese investors to retreat to their home markets for yield, which would be bad news for US bonds. However, this is not necessarily the case, as forex hedging may become more expensive due to currency volatility, and Treasury yields have already jumped alongside JGB yields.

Non-US investors have been selling Treasuries throughout the year, with foreign selling recently slowing down. The retreat in US yields from their November peaks was likely driven by domestic investors rather than global investors.

Chinese and British investors were the net buyers in the third quarter, while Japanese investors were net sellers. Japanese investors had the worst US yield premium (after FX hedging) of any developed market other than Canada this year. Whether or not Japanese buyers show up in the US, it is unclear how much it will matter.


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