WASHINGTON: Despite what you may have heard, China isn’t the country’s biggest creditor. America is.
The bulk of the national debt — soon to exceed a staggering $17 trillion — is held by the Federal Reserve, Social Security system, various pension plans for civil service workers and military personnel, U.S. banks, mutual funds, private pension plans, insurance companies and individual domestic investors.
China is responsible for just a shade over 7 percent of that total debt. And while it remains the single largest foreign lender (just ahead of Japan), China’s been slowly trimming its holdings, down from nearly 10 percent a few years ago. Overall, all foreign investors — including national central banks — account for roughly one third of the total outstanding federal government debt.
Also, China is suddenly having debt problems of its own. Heavy recent lending by its banks comes as the recovery in the world’s second-largest economy seems to be stalling. The export giant posted a rare trade deficit in March.
The national debt will soon be front-and-center again as Congress wrestles with an expected new Obama administration request to increase the government’s borrowing authority, the legislatively set debt ceiling. The higher limit would not authorize borrowing for new spending but just enables the government to pay all the bills already racked up.
The upcoming summer debate could be a repeat of the divisive debt-ceiling crisis in August 2011 when weeks of political irresolution nearly plunged the U.S. into its first-ever financial default — and did trigger a downgrade in the government’s once-sterling credit rating.
Congressional leaders are already drawing lines in the sand for the next big fiscal fight. House Speaker John Boehner, R-West Chester, has said the only way the GOP-led House will go along with raising the country’s borrowing ceiling was if President Barack Obama and the Democrats came up with a “dollar-for-dollar” amount in budget cuts.
Yet despite China’s relatively shrinking share of the U.S. debt, it continues to be the top poster child for financing America’s deficit spending habit, a favorite target for politicians in both parties.
It’s not as if U.S. leaders approach China’s bankers extending a tin cup and begging for loans. The Chinese government does what many individual investors do — it simply buys and holds widely available U.S. Treasury bills, bonds and notes.
U.S. politicians see the mountain of debt, but investors globally view U.S. Treasury securities as among the world’s safest financial havens, reflected in part by their current super-low yields.
“There’s a huge misconception here. The guy on the street thinks that we’re up to our ears in indebtedness to China. And it is a large absolute amount. But the public holds a lot more,” said Nicholas R. Lardy, senior fellow at the Peterson Institute for International Economics.
China holds just $1.22 trillion in U.S. Treasury bonds and bills, or 7.3 percent of the current $16.88 trillion total national debt, according to the Treasury Department’s “Major Foreign Holders of Treasury Securities” for February.