According to an announcement by the US Treasury Department last week, China’s holdings of US Treasuries dropped by about 6 percent or $60 billion during the first five months of FY2010, from $938 billion to $878 billion. As of February, the latest month for which data are available, China’s holdings of US Treasuries accounted for 23 percent of the US debt held by the rest of the world, $3.75 trillion, down from 26 percent at the beginning of the fiscal year. With the world’s largest non-democracy holding less of our national debt, does this news help relieve anxiety among many Americans?
China’s holdings of US Treasuries declined in both absolute and relative terms during the first five months of the fiscal year, when foreign holdings of US Treasures dipped from 47.4 percent to 45.7 percent of the US debt held by the public, that is, from $3.57 trillion out of $7.54 trillion to $3.75 trillion out of $8.2 trillion. Although the 1.6-percent change does not sound much, it actually amounts to $128 billion or 9 percent of the federal deficit for FY2009. At any rate, not only China but also the rest of the world are getting stuck with a smaller portion of the US debt.
The problem, obviously, is that China’s holdings of US Treasuries finance part of the federal deficit that has increased massively since the financial crisis hit the real economy. The US debt held by the public rose by $1.74 trillion or 30 percent in FY2009, and another $655 billion during the first five months of FY2010. In this broad picture, the $60 billion drop in China’s holdings of US Treasuries, especially while China had a trade surplus of $95.8 billion with the United States, doesn’t look so comforting. Do we want China and for that matter the rest of the world to hold more or less of our national debt?