The U.S. is in debt to the tune of $55 trillion, and the biggest creditor country is China. This phenomenon has many economic implications for China.

Why does China hold so much of the U.S. debt? First, the U.S. dollar is the country’s currency, and therefore the settlement of foreign trade is in dollars. Second, when dollars flow to China, to guarantee a balance in the total currency, dollars have to go back to the U.S. There are two ways to achieve this. One way is to purchase American products, but for China, these products are generally limited to agricultural products and Boeing aircrafts. Obviously, China cannot spend all of its dollars on these two things. The other way is to buy the national debt of the U.S.

To explore the root of this important issue, the question of why the U.S. is in so much debt needs to be addressed. The U.S. has a crucial asset: U.S. dollars. The U.S. can print as much dollars as it wants to buy products from across the world. Because of its democratic system of government, U.S. citizens have distinct welfare and freedom. This encourages people to consume beyond their means. That is, the seemingly “unlimited” availability of the U.S. dollar comes about by the U.S. government’s ability to “print” money and the willingness of other countries to purchase the U.S. government debt.

This raises the pivotal question of what impacts this phenomenon has on China. In recent years, the U.S. government has tried to push the appreciation of RMB to balance trade while reducing the amount of debt to China. However this results in heavy losses for China. In addition, China depends on exports, and if RMB appreciates, then export prices also increase, making Chinese exports less attractive to foreign buyers. This can lead to business failures and an increase in unemployment.

In sum, there is a fine balance between foreign debt and international trade. Attempts to strike this balance entail many economic implications for all parties involved.

Wendy Lin