Japan isn’t far behind, holding $900 billion, but on a per-captia basis ($7100) Japan is way ahead.
The question isn’t why China (or Japan) holds US obligations, but why does China own anyone’s debt at all? If China has a trillion dollars lying around with which to invest, why doesn’t China just reduce their own debt? Or if they have no debt, why don’t they reduce their taxes? Or use the money to build up their own infrastructure?
As a secondary question, how much foreign debt does the US government own? How much of that is “real” debt that will be collected, and how much of that debt is not collectible or will likely be forgiven (“foreign aid”) when the obligations come due?
You seem to be missing the fact that interest is paid on the debt (over $400 billion annually), so it’s an investment like any other debt instrument. Buying US debt also helps prop up the US dollar and keeps foreign currencies low relative to the dollar making their exports more attractive to US customers. There are a few other more subtle reasons and you can probably find in depth analysis of those if you were to search for threads about China on this board.
The big driver is really trade. As long as the US buys more stuff from China than it sells to China, the Chinese will end up with excess dollars. Which they have to do something with.
There are good reasons for them to buy US debt rather than, say, EU or japanese debt with those dollars. And it all has to do with keeping the two currencies at their desired relative levels.
It’s deeper than I can readily write a two-paragraph explanation for. But somebody in that industry certainly can.
It is a consequence of having a managed exchange rate. The Chinese want to keep the value of the RMB lower than the market would suggest, so they issue RMB and buy dollars, and that’s what they end up with. Since the dollars have to go somewhere and US government bonds are the safest place, that’s where it goes.
It’s important to note which is the cart and which is the horse here. The Chinese government isn’t engaging in currency speculation, or investing in US debt for the interest return, none of these things mean anything to them. What does the Chinese government want with dollars? They don’t want dollars, they hold dollars because that’s just one of the side effects of a managed exchange rate. They don’t “have a trillion dollars to invest”, because all those dollars were purchased with RMB, so at the end of the day they don’t have any more money in the bank, so to speak, than they would if they didn’t have any dollars at all.
One of your questions is: Why is China earning money faster than it spends it? A short answer is: Why not? Perhaps others should try that! You ask why they don’t “use the money to build up their own infrastructure?” I believe they are doing just that, but there are limits beyond which excessive investment speed becomes inefficient or ill-advised. Not to mention that they wouldn’t be exporting so much if they stopped routing their dollars back into the importing countries.
As for why they place their excess dollars into U.S. Treasury bonds specifically, I suppose those who think SS bonds are an “accounting gimmick” will be along to recommend that China stuff the banknotes under its mattress, perhaps converting them first to its stronger Renminbi. :smack: (A slightly different class of nuts will gloat that we’ve got China where we want them now: if they don’t do what we tell them we’ll void their U.S. bonds.)
I don’t know the total debt owed by foreign governments to the U.S. government but am sure it’s much less than the vice versa. (Ronald Reagan famously changed the U.S. government from the world’s largest net lender to the world’s largest net borrower in just a few years.)
It doesn’t answer your question but this page (en.wikipedia.org/wiki/Net_international_investment_position) gives an answer to a related question. I think it shows the net difference in worth of all cross-border investments (bonds, stocks, etc.) whether government- or private-owned. The U.S. appears as -17% of GDP, behind U.K.and France, but still ahead of So. Korea and Sweden. The U.S. is $2.5 trillion down in this chart, which, I think, is roughly the sum of $5 trillion foreign-held U.S. treasury bonds, less $2.5 trillion foreign bonds and stocks held by U.S. investors. (How to interpret that statistic is another matter. )
Is it China, the country/ Government that owns the debt /does the investment, or individual people in China (the rising middle-class for example)? Because you can apply the same question to the US: there are several millionaires in the US (besides Bill Gates), why don’t they reduce the US debt (which is about to collapse shortly, making the US bankrupt)? Answer: to invest in bonds by the US govt. is not as good an investment idea as investing elsewhere.
Similar for the Chinese. Given their government, they probably want investment out of the country as much as possible, I assume.
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