Why Did the US Borrow Money From China?
Understand the economic factors and financial processes behind China's position as a key holder of US government debt.
The United States federal government borrows to finance operations when spending exceeds revenue, creating a budget deficit. The national debt is the accumulation of these annual deficits, representing the total amount owed to creditors. Borrowing funds public services and helps respond to economic fluctuations or emergencies.
Understanding US Government Debt
The United States government accumulates debt when its expenditures surpass its revenues. For example, in fiscal year 2024, the federal government spent approximately $6.75 trillion but collected $4.92 trillion in revenue, leading to a deficit of $1.83 trillion. This shortfall necessitates borrowing to cover the difference.
Major drivers of federal spending include social programs like Social Security and Medicare, national defense, and infrastructure projects. Economic downturns or national emergencies, such as recessions or health crises, can further increase borrowing needs as tax revenues decline and government spending on stimulus or relief efforts rises. For instance, federal spending increased substantially from 2019 to 2021 in response to the COVID-19 pandemic.
The national debt is categorized into two main types: public debt and intragovernmental debt. Public debt, roughly 80% of the total, is owed to external investors, including individuals, corporations, and foreign entities. Intragovernmental debt represents money one part of the federal government owes to another, such as trust funds like Social Security lending their surpluses to the Treasury. As of May 2025, the total US national debt exceeded $36 trillion.
China’s Role as a US Creditor
China emerged as a significant holder of US debt due to its export-led economic strategy. This approach led to substantial trade surpluses with the United States, meaning China exported far more goods than it imported. The influx of US dollars from these exports accumulated as vast foreign exchange reserves within China’s central bank, the People’s Bank of China (PBOC).
To manage the value of its currency, the yuan, and keep its export prices competitive, China’s central bank often intervened in currency markets. This involved purchasing incoming US dollars to prevent the yuan from appreciating too rapidly. These accumulated dollar reserves were then invested in safe and liquid assets, with US Treasury securities being a primary choice due to their stability and the dollar’s status as a global reserve currency.
China’s foreign exchange reserves grew substantially, making it the world’s largest holder. For example, China’s foreign exchange reserves reached nearly $4 trillion in June 2014. A significant portion of these reserves was channeled into US Treasury bonds, notes, and bills, solidifying China’s position as a major foreign creditor.
How US Debt is Acquired
The US government acquires debt by issuing financial instruments known as Treasury securities. These securities, which include Treasury bills, notes, and bonds, are sold by the US Department of the Treasury to a wide range of investors globally. The process is managed through regular public auctions to ensure competitive bidding and efficient financing.
Treasury auctions are held on a predictable schedule, with announcements detailing the type and amount of securities offered. Investors, including foreign governments like China, central banks, private institutions, and individuals, submit bids to purchase these securities. Bids can be competitive, where investors specify the yield they are willing to accept, or non-competitive, where bidders agree to accept the yield determined at the auction. This auction mechanism allows the US government to raise funds directly from the market, and foreign entities like China participate to acquire US debt.
Current Dynamics of China’s Holdings
China’s holdings of US Treasury securities have seen fluctuations in recent years, reflecting shifts in its economic strategy and global financial dynamics. As of May 2025, China’s holdings stood at approximately $756.3 billion, marking a decrease from previous periods and representing the third consecutive month of reductions in 2025. This positions China as the third-largest foreign holder of US Treasury debt, following Japan and the United Kingdom.
While China remains a substantial creditor, its share of foreign-owned US debt has generally declined from its peak. This trend is influenced by China’s efforts to diversify its foreign exchange reserves, reducing reliance on a single currency or asset class. Factors such as geopolitical considerations, domestic economic priorities, and global interest rate environments can also influence China’s decisions regarding its Treasury holdings.