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Will Major Lenders Be Concerned about US Debt Levels?

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Major lenders to the United States

As we discussed in the previous part of this series, China (FXI), Japan (EWJ), Ireland, and the Cayman Islands hold the majority of the debt issued to the United States. The reason for these countries holding such high US debt is the trade surplus with the United States. The United States pays for this trade deficit in US dollars (UUP), and these countries use these surplus funds to buy dollar assets, mostly US government debt. They’re indirectly funding the US government to import more goods from their respective countries. As per the US Treasury, China holds the highest US debt, valued at $1.18 trillion, followed by Japan, with holdings valued at $1.09 trillion. The total federal debt owned by foreign federal agencies is $5.6 trillion, which is a little less than 30% of the total outstanding US debt.

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China, the largest creditor to the United States

Recent reports have suggested that China could be considering investing some of its surplus in other sovereign debt, and Japan could do the same. The other consideration is the rise of the Chinese renminbi (CYB) in the foreign exchange markets. If China starts dealing in its own currency, it would have fewer US dollars (USDU) to invest, leading to further problems for the US Treasury.

Will other countries follow China?

Other major lenders from oil-producing countries, which have seen a fall in US imports as the production of shale oil has increased, have also reduced their US holdings. These countries might not pull the plug on US debt all at once, but they might reduce their holdings as the US debt problem continues to grow. As more countries become protectionist, chances are these lenders could turn elsewhere. In the next part of this series, we’ll see why the US economy is facing a huge debt problem.

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