China Doesn't Own the U.S., Japan Does

Why China May No Longer Be America’s No. 1 Debt Buyer

As Beijing rejiggers its economic strategy and lets its currency weaken, Japan is likely about to become to the top foreign holder of U.S. Treasuries. What does this mean?

by Daniel Gross  

You hear it all of the time. The problem is that the government is borrowing from China to fund our stupid spending programs, or popular subsidies, or tax cuts. Mitt Romney (remember him?), in a presidential debate, defined his criterion for deciding whether spending is worthwhile thusly: “Is the program so critical it’s worth borrowing from China to pay for it?” Big Bird famously didn’t meet that test. In the vice-presidential debate, Paul Ryan criticized subsidies for electric cars, and wondered“Was it a good idea to borrow all this money from countries like China and spend it on all these various different interest groups?” Democrats do it, too. Pollster Mark Mellman, writing in The Hill, described how he used the “borrowing from China” line in a recent poll.

Subtle, this isn’t. Politicians of all stripes warn that it’s a bad idea for Americans to borrow from a rival, a potential enemy, a country with a fundamentally different and authoritarian political system. Relying on China as a lender will reduce our freedom of movement, harm our values, and diminish the country. And in recent years, our massive trade deficit has led to ever-increasing Chinese purchases of U.S. government debt. For much of the past two decades, China’s central bank has hoovered up all the dollars we sent to purchase plastic stuff and clothes, and then used it to buy dollar-denominated assets, the better to keep its currency weak against the dollar. A year ago, China was far and away the largest foreign owner of U.S. debt; it sat on a $1.27 trillion stockpile.

But the global economy is a dynamic place. Things change. And today, it’s highly likely that the biggest foreign holder of U.S. debt isn’t the snarling Asian tiger of China. Rather, it’s the wounded, unthreatening kitty cat of Japan.

That’s right, Japan. Twenty years ago, Japan occupied the place that China now does in our commercial imagination—the aggressive, swashbuckling, mercantilist power from the east that was bent on global economic domination. But the past two decades haven’t been kind to Japan. Hampered by low growth, demographic decline, a constipated political system, a scarcity of energy resources, a massive debt overhang, and a crippling 2011 tsunami, Japan has become the sick man of Asia. The country still remains wealthy, and has a high savings rate. And its central bank and private investors always had a huge portfolio of U.S. government bonds. 

In September 2011, China held $1.27 trillion in Treasury securities, or 26 percent of the total owned by foreigners, while Japan held $984 billion, or about 20 percent. But something has happened in the past year. China’s export growth has slowed, and the country is trying to move toward a consumption-driven economy. At the same time, China’s central bank has let its currency decline in value against the dollar. Between September 2011 and September 2012, in fact, its U.S. debt holdings shrank to $1.155 trillion, down nearly 11 percent. (For a deeper historical dive, go here.) 

Meanwhile, Japan’s holdings have risen. Investors seek relative value. And while American bonds may not pay much interest, they pay more than bonds issued by Tokyo. One man’s low-yielding bond is another man’s high-yielding bond. But there are also mercantilist motives at work. “Japan has done some intervention to keep the yen from appreciating against the dollar,” said Ted Truman, senior fellow at the Peterson Institute for International Economics, in Washington, D.C. In addition, Japan may have bought U.S. bonds as a way of diversifying away from the troubled euro. And so between September 2011 and September 2012, Japan’s holdings of Treasury securities rose to $1.13 trillion, up $146 billion, or 15 percent.

For all those who say the U.S. doesn’t make anything the world wants, look no further than the Treasury’s monthly statement of the public debt.

That data is from the end of September, nearly two months ago. The next reading, for October, will come out in the middle of this month. If the trends of the past year have continued, and China’s holdings have fallen or been flat in the past two months while Japan’s holdings have risen, it’s highly likely that Japan has already displaced China as America’s chief international lender.

Over the past few years, our dependence on China as a lender has declined in both absolute terms and in relative terms. For all those who say the U.S. doesn’t make anything the world wants, look no further than the Treasury’s monthly statement of the public debt, which can be seen here (PDF). We manufacture government debt. And the world buys it. In the recently concluded fiscal year, the deficit was about $1.1 trillion. Between September 2011 and September 2012, the grand total of marketable debt held by foreigners rose from $4.9 trillion to $5.455 trillion, or about $555 billion.

So, yes, the amount of debt owned by foreigners has risen in the past year. But the portion of the debt owned by foreigners has stayed about the same—at about 51 percent—and the portion owned by China has fallen sharply. China’s total holdings of U.S. debt are about where they were in the middle of 2010, when the volume of total U.S. debt was much smaller.

So, the more accurate anti-spending, anti-borrowing rhetorical trope should be: “We’re borrowing from ourselves to fund the government, plus more than we used to from Japan and somewhat less than we used to from China.” But I doubt that tests well with focus groups.