Japan – China – US Debt

Japan remains the largest holder of the US as of May 2024, holding $1.186 trillion in Treasury securities and 14.7% of all foreign-owned US debt. China has been selling off its holdings in an urgent effort to distance itself from the US, but is currently the second-largest holder of US debt, carrying about $767.4 billion as of March 2024. I largely speak about China’s debt holdings because they were the top buyer of US debt before the political landscape changed.

Within a mere four years, China sold off 30% of its holdings or over $250 billion in US debt. This assisted the yuan in general as China was able to use the exchange rate to buy yuan when the currency depreciated. China seemed to be assisting Trump years ago in lowering the dollar to ease trade frictions. That is no longer the case here as the United States enacted economic warfare against Russia, pushing it off SWIFT, confiscating private assets, and implementing countless sanctions. The United States did all of this to Russia without officially being at war. Who is to say the same would not happen to China under the excuse of Taiwan?

Negative interest rates were a huge mistake for Japan. Unlike China, Japan aims to strengthen ties with the US. The nation drastically increased its holdings of US debt in 2023. US bonds seem safter than the low-yield returns provided domestically in Japan. Funds are moving out of Japan and into the US. They see US debt as relatively safe as they have a strong alliance with the US and the yield are simply higher.

The advice I used to provide to Japan to help reduce the trade friction was to buy gold in New York and sell it in London. The trade numbers could care less about the product actually being exported. It will reduce the trade deficit and make US exports appear to rise. It is just an accounting ploy. Likewise, the booming exports of China were being manipulated by Chinese companies borrowing dollars in Hong Kong and then bringing that money into China and collecting three times that cost in interest. Headlines are always made on the numbers without understanding the accounting.

I received the question of why I speak about China’s purchases and not Japan’s. Again, I speak primarily of China’s offloading of US debt because that is a larger issue. China has not slowed its pace of offloading US Treasuries and this becomes a problem as the debt crisis will come to a head when there is simply no one willing or able to buy US government debt. The Fed desperately needed China’s participation as its plan was to roll over its debts perpetually. They simply cannot pay off $34+ trillion and counting. Japan and the UK cannot compensate for the loss of Chinese purchases.