As the clock ticks down toward an unprecedented US debt default, the world’s second- and third-biggest economies are watching in fear.
China and Japan are the largest foreign investors in American government debt. Together they own $2 trillion — more than a quarter — of the $7.6 trillion in US Treasury securities held by foreign countries.
Beijing started to ramp up buying of US Treasuries in 2000, when the United States effectively endorsed China’s entry into the World Trade Organization, triggering an export boom. That generated vast amounts of dollars for China and it needed a safe place to stash them.
US Treasury bonds are widely regarded as one of the safest investments on Earth, and China’s holdings of US government debt ballooned from $101 billion to peak at $1.3 trillion in 2013.
China was the largest foreign creditor to the United States for more than a decade. But an escalation of tensions with the Trump administration in 2019 saw Beijing pare back its holdings, and Japan surpassed China as the top creditor that year.
Tokyo now holds $1.1 trillion, to China’s $870 billion, and that heavy exposure means both countries are vulnerable to a potential crash in the value of US Treasuries if the doomsday scenario for Washington were to unfold.
“Japan and China’s large Treasury holdings could hurt them if the value of Treasuries plummets,” said Josh Lipsky and Phillip Meng, analysts from the Atlantic Council’s GeoEconomics Center.
The falling value of Treasuries would lead to a drop in Japan and China’s foreign reserves. That means they would have less money available to pay for essential imports, service their own foreign debts, or prop up their national currencies.
Nevertheless, the “real risk” comes from the global economic fallout and likely US recession that could follow from a default, they said.
“That is a serious concern for all countries but poses a particular risk to China’s fragile economic recovery,” Lipsky and Meng said.