U.S. Foreign Debt to China: Economic Risks and Imbalance

Introduction

The recent global economic crisis, which began largely — almost entirely, according to some views — in the United States as a result of several unregulated business practices and questionable debt and asset shifting, has led many to question certain underlying principles of the global economic situation. One of the most pressing of these issues, particularly for the United States, is the amount of foreign debt owed by consuming countries to those that are still more geared toward production. One of the most extreme examples of such a trade deficit is that which exists between the United States and China. In terms of both private investment and government purchasing of securities and bonds — essentially loans to the federal government — the amount of U.S. debt that China holds has the potential to create major economic upheaval in the United States and around the world. It is very likely to do so unless this debt is significantly reduced and greater balance is achieved.

The Creation of Foreign Debt

Though in some ways the issue of foreign debt is relatively straightforward, some aspects of China's ownership of United States debt are more complex. This complexity has made it difficult for experts and officials to determine exactly how much debt China holds in the way of Treasury securities and other forms of investment (Dickson, 2010). Determining how this debt accumulated, and its true extent, is a necessary step toward understanding the problem.

According to statements released by the United States Treasury Department, China held over $750 billion worth of Treasury securities, but most economists and analysts insist that this figure hugely undervalues China's actual holdings (Dickson, 2010). By placing funds in foreign banks and then using those funds to purchase additional U.S. Treasury securities, China has greatly extended its holdings of U.S. foreign debt — a practice that has been especially evident through certain London banks serving as intermediaries (Dickson, 2010). China also considers the exact makeup of its considerable foreign reserves — estimated at nearly $2.5 trillion in value — a state secret, but it is estimated that as much as seventy percent of this reserve is held in U.S. bonds, bringing China's total ownership of U.S. debt to well over one trillion dollars (Dickson, 2010). Continued investment through foreign intermediaries and secrecy surrounding its holdings not only makes the Chinese government's exact stake in U.S. debt impossible to accurately state, but also increases the degree of imbalance in the economic power each nation holds over the other.

The undervaluation of the yuan, which is artificially depressed to an estimated twenty-five to forty percent below its natural value by the Chinese government, also greatly increases the disparity in U.S. debt held by China (Dickson, 2010; Xin, 2009). China plans to continue holding U.S. debt as a solid future investment, which will only serve to widen the imbalance still further (Xin, 2009). The potential for future turmoil is also mounting.

Conclusion

Economic tides are always in a state of constant shifting; it is not conceivable that the United States would be able to retain its global economic dominance in perpetuity. Yet the current situation of foreign debt, particularly to China, creates a degree of instability and uncertainty that is greater than necessary. Addressing this issue through a reduction of foreign debt and by limiting foreign investment in U.S. Treasury securities would enable a smoother transition as those tides continue to turn.