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Can someone please explain to me how we are in debt with China? Every weblog, article, journal I read have people in the comments going insane about how we "owe China monies" and "China owns the US" or how the world is being taken over by China!!

From my understanding we sell bonds to the open market (like most countries and businesses) and China is just one country in a laundry-list of countries that buy these bonds. These bonds are also NOT the same as debt right? I just don't know why people say that we "owe too much money to china" What am I missing?

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closed as off topic by Joshua Ulrich, vonjd, olaker Jul 14 '11 at 19:47

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This is roughly what countries own US treasuries:

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

As you can see China owns a lot. In fact they own way more than any other nation. Why does China own so many? Because of the trade deficit between the US and China. What's that? China has gotten all of it's fortune by being the factory that makes things for other companies. China is the factory of the world. Hence whenever a product in the world is created more than likely the Chinese had some hand in building it. Every IPod, IPad, Android Phone, etc sold has to be bought from China because they made it. The act of buying those products produced outside your countries borders is called importing. The USA imports goods from China. Now in theory the USA should be manufacturing things that China wants and hence because we are in a good trade relationship (we're not again theory), China would buy things from us that we manufacture. Say cars, windows software, mac os software, etc. The fact of the matter is that the US is buying way more stuff from China than they are buying from the US. This creates a the trade deficit. A trade deficit means more money is moving out of the USA and into China.

How does a nation get rich? By exporting more than they import. Across all of it's trading partners the USA is importing vastly more than exporting. In fact the USA can't really pay for everything it's importing each year, and the US government is running debt over it's spending thanks to social security (funded, but poorly), medicare (not directly funded - big problem), and the military (DOD spending accounts for ~60% of all government spending). So to cover these losses it has to borrow money from the Treasury. When the US borrows money from the Treasury it issues that in terms of US Treasury bonds. A bond says 'Let me have $100 today, and I'll pay you back $103 tomorrow.' In order for the US to pay its debts someone has to buy our bonds to get that $100. Who is doing that?

Well China is making tons of money. Where do they park that money so it can grow and earn interest? Countries aren't like you and I in this regard. They don't hop down to bank and dump their money in there. Instead they buy debt from other countries. The best debt and most stablest debt in the world is US Treasury Debt because they've never defaulted and they are the richest country in the world. Because of that their currency is really predictable and doesn't have crazy inflation. To protect that money China owns China buys US Treasury bonds. And they've been doing this for 40 years or more. So US is buying China's goods with China's money and promising to pay China back at a later date. China is happy to do this because they can safely earn an almost guaranteed interest on their money keeping it safe from inflation.

Another reason China does this, and really the primary reason is to keep their inflation low. When China sells goods into the US it gets paid in dollars, but ultimately it wants Renminbi so under normal circumstances it would exchange dollars for Renminbi and then import that money back into China. When this happens it will raise the demand for Renminbi, and trade will balance out as China's currency rises. This eliminates trade imbalances, except that China doesn't do that. They've been buying US bonds from dollars they have rather than buying Renminbi. This keeps the money out of the China banking system so it doesn't experience inflation. That is how China "manipulates" their currency is by buying foreign bonds keeping the money from causing inflation in their country. China has dialed back their rate of buying US bonds around 2013 or 2014 so they are letting their currency rise more than in the past. They really aren't manipulating their currency like they were in the past.

This is why the argument over the debt ceiling is really really important. The debt ceiling is what allows the US government to keep borrowing money. There is a US law that says the US government will never borrow more than X. And they rewrite that law every time the US needs to borrow more than X (it's been rewritten a lot for like 30 years since 1980s - except for 1998-2001 where it ran surpluses). They are in the process of rewriting that law now to up the debt ceiling to Y, and they're playing an ideological war over all the shit they argue about. In the end they have to raise it because there is no other option, but they're playing a game of chicken with each other. If they didn't we would default on paying back debt. Essentially, the holders of those US bonds wouldn't get $103 back, and they'd be really super pissed off. This could cause US holders of debt to rethink it call in early payment on that debt.

If China decides to call in the debt the US has to pay them and would have a shortage of funds to pay that debt. The US would be absolutely screwed. Remember the US doesn't have any money because it's been selling US bonds to get money, so the US can't get money because it just defaulted on the one thing that brings in the money. And who's gonna want to buy them? If this came to pass and it would ruin the USA. This would be financial system Armageddon because China (and others) owns so much of our money. We owe them so much money that we'd never pay them back for the next century or two. That kind of debt is basically financial slavery. We're talking 100 years of the Great Depression type conditions. Huge inflation, US money would be worthless. It'd make Zimbabwe look like a stable investment.

Now what holds this altogether is that having the US falter like that would take everyone down because everyone looses their money. US owes everyone so every dollar we make of GDP would go right out the window to our debt holders, and their savings would be obliterated because we defaulted. This is the end of the world as we know it type stuff should it come to pass.

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    $\begingroup$ This could be the best answer to any question on the stackexchange network. Thorough, detailed, smart, and so very informative. I hope that many many people see this answer and become smarter. Thank you so much for explaining this to me and making me INFORMED! All the best! $\endgroup$ – Robert Jul 14 '11 at 14:12
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    $\begingroup$ So I don't get why politicians are letting this happen? It seems very bad position for us to be in and maintain any kind of superpower status. Could it be that people are right and China will one day "take over the US" (as a superpower). $\endgroup$ – Robert Jul 14 '11 at 14:15
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    $\begingroup$ Well it has to happen and that creates a perfect place to get what you want. They have to raise the debt ceiling therefore holding it hostage and you can demand a lot of shit. Because they have to pass it they are acting like they aren't going to let it happen so they can take out federal funding for abortion, the national parks, education, and other ideological funding cuts that don't really fix the real problem of US overspending. If they really wanted to stop over spending they'd have to cut things that will hurt their chances of being re-elected. No one Repubevil or Democrap will do it. $\endgroup$ – chubbsondubs Jul 14 '11 at 14:53
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    $\begingroup$ Here is an interesting article about how this game of chicken is playing out. They've both screwed themselves by pandering their constituencies and whipping up the troops over something that shouldn't be this big of a deal. Don't get me wrong we really need to stop raising the ceiling, but now is not the time to think about standing our ground. This is a long term thing that has to be planned. articles.cnn.com/2011-07-11/opinion/… $\endgroup$ – chubbsondubs Jul 14 '11 at 14:56
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    $\begingroup$ -1: This post contains several factual errors (e.g. please provide supporting studies that show trade deficits cause nations to become poorer). It also only represents a extreme mercantilist view. It would have been nice to note that a big reason China exports so much and buys so many Treasury bonds is that it pegs the Yuan to the USD. Regardless, this question is very off-topic for this site. $\endgroup$ – Joshua Ulrich Jul 14 '11 at 15:26

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