Hong Kong CNN —
As the clock ticks down toward an unprecedented US debt default, the world’s second- and third-biggest economies are watching in fear.
China and Japan are the largest foreign investors in American government debt. Together they own $2 trillion — more than a quarter — of the $7.6 trillion in US Treasury securities held by foreign countries.
Beijing started to ramp up buying of US Treasuries in 2000, when the United States effectively endorsed China’s entry into the World Trade Organization, triggering an export boom. That generated vast amounts of dollars for China and it needed a safe place to stash them.
US Treasury bonds are widely regarded as one of the safest investments on Earth, and China’s holdings of US government debt ballooned from $101 billion to peak at $1.3 trillion in 2013.
China was the largest foreign creditor to the United States for more than a decade. But an escalation of tensions with the Trump administration in 2019 saw Beijing pare back its holdings, and Japan surpassed China as the top creditor that year.
Tokyo now holds $1.1 trillion, to China’s $870 billion, and that heavy exposure means both countries are vulnerable to a potential crash in the value of US Treasuries if the doomsday scenario for Washington were to unfold.
“Japan and China’s large Treasury holdings could hurt them if the value of Treasuries plummets,” said Josh Lipsky and Phillip Meng, analysts from the Atlantic Council’s GeoEconomics Center.
The falling value of Treasuries would lead to a drop in Japan and China’s foreign reserves. That means they would have less money available to pay for essential imports, service their own foreign debts, or prop up their national currencies.
Nevertheless, the “real risk” comes from the global economic fallout and likely US recession that could follow from a default, they said.
“That is a serious concern for all countries but poses a particular risk to China’s fragile economic recovery,” Lipsky and Meng said.
After an initial burst in activity following the abrupt lifting of pandemic restrictions late last year, China’s economy is now sputtering as consumption, investments, and industrial output all show signs of slowing. Deflationary pressure has worsened as consumer prices barely moved during the past few months. Another major concern is the soaring unemployment rate for young people, which hit a record level of 20.4% in April.
Japan’s economy, meanwhile, is just showing signs of emerging from stagnation and deflation, which have haunted the country for decades.
Even if the US government runs out of money and extraordinary measures to pay all its bills — a scenario that Treasury Secretary Janet Yellen has said could happen as early as June 1 — the likelihood of a US default may still be low.
Some US lawmakers have proposed prioritizing the payment of interest on bonds to the biggest bondholders.
This would be done at the expense of other obligations, such as payment of government pensions and salaries to government employees, but would stave off major debt defaults to the likes of Japan and China, said Alex Capri, senior lecturer at NUS Business School.
And without a clear alternative, in response to rising market volatility investors could swap shorter term bonds for longer term debt. That could benefit China and Japan, because their holdings are concentrated in longer-term US Treasuries, according to Lipsky and Meng from the Atlantic Council.
That said, broader financial contagion and economic recession are a much bigger threat.
“A debt default in the US would mean a fall in US Treasury prices, a rise in interest rates, a fall in the value of the dollar, and increased volatility,” said Marcus Noland, executive vice president and director of studies at the Peterson Institute for International Economics.
“It would also likely be accompanied by a fall in the US stock market, increased stress on the US banking sector, and increased stress on the real estate sector.”
That could lead the interconnected global economy and financial markets to stumble, too.
China and Japan are dependent on the world’s biggest economy to support companies and jobs at home. The export sector is especially crucial to China, as other pillars of the economy — such as real estate — have faltered. Exports generate a fifth of China’s GDP and provide jobs for around 180 million people.
Despite rising geopolitical tension, the United States remains China’s single largest trading partner. It’s also the second largest for Japan. In 2022, US-China trade hit a record high of $691 billion. Japan’s exports to America increased by 10% in 2022.
“As the US economy slowed, the impact would be transmitted through trade, depressing Chinese exports to the US, for example, and contributing to a global slowdown,” said Noland.
Bank of Japan Governor Kazuo Ueda expressed concerns last Friday, warning that a US debt default would cause turmoil in various markets and have serious consequences for the global economy.
“The Bank of Japan will strive to maintain market stability based on its pledge to respond flexibly with an eye on economic, price and financial developments,” he told parliament, according to Reuters.
Beijing, so far, has been relatively quiet on the matter. The foreign ministry commented Tuesday that it hopes the United States will “adopt responsible fiscal and monetary policies” and “refrain from passing on risks” to the world.
Chinese state news agency Xinhua published a column earlier this month, highlighting the “symbiotic relationship” the countries have in the US bond market.
“If the United States defaults on its debt, it will not only discredit the United States, but also bring real financial losses to China,” it said.
There’s nothing much Tokyo or Beijing can do, other than wait and hope for the best.
Hastily dumping US debt would be “self-defeating,” Capri said, as it would significantly drive up the value of the Japanese yen or the Chinese yuan against the dollar, causing the cost of their exports to “go through the roof.”
In the longer term, some analysts say a potential US default could push China to accelerate its drive to create a global financial system that is less dependent on the dollar.
The Chinese government has already struck a series of deals with Russia, Saudi Arabia, Brazil, and France to increase the use of yuan in international trade and investment. A Russian lawmaker said last year the BRICS countries, namely China, Russia, India, Brazil, and South Africa, are exploring the creation of a common currency for cross-border trade.
“This will certainly serve as a catalyst for China to continue to push the internationalization of the yuan, and for Beijing to double down on its efforts to bring its trading partners into the newly announced ‘BRICs Currency’ initiative,” Capri said.
However, China faces some serious obstacles, such as controls it applies to how much money can flow in and out of its economy. Analysts say Beijing has shown little willingness to fully integrate with global financial markets.
“A seriouspush for de-dollarization would see … much more volatile yuan trading,” said Derek Scissors, senior fellow at the American Enterprise Institute.
Recent data from international payments system SWIFT showed that the yuan’s share of global trade financing was 4.5% in March, while the dollar accounted for 83.7%.
“There is still a long way to go before a credible alternative to the US dollar can emerge,” Lipsky and Meng said.
Chinese state news agency Xinhua published a column earlier this month, highlighting the “symbiotic relationship” the countries have in the US bond market. “If the United States defaults on its debt, it will not only discredit the United States, but also bring real financial losses to China,” it said.What country holds the most US debt? ›
Investors in Japan and China hold significant shares of U.S. public debt. Together, as of September 2022, they accounted for nearly $2 trillion, or about 8 percent of DHBP. While China's holdings of U.S. debt have declined over the past decade, Japan has slightly increased their purchases of U.S. Treasury securities.What happens if the US defaults on debt? ›
The consequences of a default would be enormous, both for the nation and the world. If the debt ceiling isn't raised in time, Treasury and the White House will have to make difficult decisions about which bills to pay with the funds that are available. The US has never missed making payments on its bills before.Did the US ever default? ›
The US has never intentionally defaulted on its debt before (the US technically, but accidentally, defaulted in 1979 due to what Treasury identified as a check processing issue.Will China ever forgive Japan? ›
After 60 years there is still no prospect of a true reconciliation between China and Japan. The recent visit by Junichiro Koizumi, Japan's prime minister, to a war shrine in central Tokyo was condemned by the Chinese.Does the US depend on China? ›
Today, the United States imports more from China than from any other country, and China is one of the largest export markets for U.S. goods and services. This trade has helped the United States in the form of lower prices for consumers and higher profits for corporations, but it has also come with costs.What country is #1 in debt? ›
United States. The United States boasts both the world's biggest national debt in terms of dollar amount and its largest economy, which resolves to a debt-to GDP ratio of approximately 128.13%. The United States' government's spending exceeds its income most years, and the US has not had a budget surplus since 2001.How long will it take to pay off the US national debt? ›
To pay back one million dollars, at a rate of one dollar per second, would take you 11.5 days. To pay back one billion dollars, at a rate of one dollar per second, would take you 32 years. To pay back one trillion dollars, at a rate of one dollar per second, would take you 31,688 years.What percentage of US debt is owned by China? ›
In fact, Treasuries are a logical investment for a country with high foreign currency reserves. China currently holds almost 11.96% of U.S. foreign debt.Can a country refuse to pay its debt? ›
If a country can't pay its debts, it is in default. This lowers its credit rating and decreases the cost of its debt. The country's entire economy can suffer, and it may see less investment in the future as global investors become wary of buying that country's debt.
A debt doesn't generally expire or disappear until its paid, but in many states, there may be a time limit on how long creditors or debt collectors can use legal action to collect a debt.How do you prepare for a US default? ›
- Build an emergency fund. ...
- Reduce debt. ...
- Wait to buy a home. ...
- Diversify your investments but don't overdo it. ...
- Review and adjust financial plans.
Total U.S. national debt was $31.38 trillion as of January 2023.Has the US ever been debt free? ›
By January of 1835, for the first and only time, all of the government's interest-bearing debt was paid off. Congress distributed the surplus to the states (many of which were heavily in debt). The Jackson administration ended with the country almost completely out of debt!Why is the US in debt to itself? ›
The national debt is an accumulation of federal budget deficits. Each new spending program and tax cut adds to the debt.Does Japan rely on China? ›
At the same time, the relationship with China is one of Japan's most important bilateral relationships, and the two countries have close economic relations, as well as people-to-people and cultural exchanges.
Companies from Japan, the United States and other nations are accelerating their moves to shift production out of China, to lessen the risk of disruption in their supply chains due to abrupt changes in Chinese government policy and turmoil following the spread of COVID-19.What would happen if China surrendered to Japan? ›
If China had surrendered in 1938, Japan would have controlled China for a generation or more. Japan's forces might have turned toward the USSR, Southeast Asia, or even British India. The European and Asian wars might never have come together as they did after Pearl Harbor in 1941.Will China catch up with the US? ›
It has become a global expectation that China's total economic size will surpass that of the US in the next decade or so, and as long as China focuses on developing itself well, this result will be achieved naturally.What would happen if US stopped all trade with China? ›
BEIJING — The U.S. economy could lose more than $1 trillion worth of production and long-term global competitiveness if the White House pursues a sharp separation with China, according to a report released Wednesday by the U.S. Chamber of Commerce and Rhodium Group.
This data suggests that if U.S. hypothetically stops buying Chinese goods, China's export will suffer a 18% loss, which accounts for 18%*20% = 3.6% of China's GDP. It is unlikely a 3.6% loss in GDP will collapse the Chinese economy.What country is in zero debt? ›
|Characteristic||National debt in relation to GDP|
|Hong Kong SAR||4.26%|
A low level of debt shows less reliance on foreign borrowings. The best example can be taken from Hong Kong (it is a one of the debt free countries), whose economy has the least debt to GDP ratio. It is an almost debt free country. It has a well-regulated financial system and large foreign reserves.Who does China borrow money from? ›
At the end of 2021, of the 98 countries for whom data was available, Pakistan ($27.4 billion of external debt to China), Angola (22.0 billion), Ethiopia (7.4 billion), Kenya (7.4 billion) and Sri Lanka (7.2 billion) held the biggest debts to China.What would happen if the US defaulted? ›
U.S. debt, long viewed as ultra-safe
A default could shatter the $24 trillion market for Treasury debt, cause financial markets to freeze up and ignite an international crisis.
The federal government borrows money from the public by issuing securities—bills, notes, and bonds—through the Treasury. Treasury securities are attractive to investors because they are: Backed by the full faith and credit of the United States government.How can we fix U.S. debt? ›
- Avert a debt ceiling crisis and build consensus with a bipartisan commission on fiscal reform/debt reduction. ...
- Make fiscal restraint a priority. ...
- Reform Medicare/health care policy. ...
- Save Social Security. ...
- Remove budget gimmicks and pay for new initiatives. ...
- Reform tax policy.
The countries with the biggest debt burdens in relative terms were Djibouti and Angola, followed by the Maldives and Laos, which opened a debt-laden railway line to China last year.How much is the United States of America worth? ›
United States - Federal Government; Net Worth (IMA), Level was -20997153.00000 Mil. of $ in July of 2022, according to the United States Federal Reserve.How much U.S. debt does Russia hold? ›
The value of U.S. Treasury securities held by residents of Russia amounted to 67 million U.S. dollars in January 2023, having declined by 89 percent from the previous month. Furthermore, in March 2020, the figure decreased sharply to 3.85 billion U.S. dollars, down from 12.6 billion U.S. dollars one month prior.
The Fed tries to influence the supply of money in the economy to promote noninflationary growth. Unless there is an increase in economic activity commensurate with the amount of money that is created, printing money to pay off the debt would make inflation worse.What is the largest debt default in history? ›
The biggest private default in history is Lehman Brothers, with over $600 billion when it filed for bankruptcy in 2008 (equivalent to over $750 billion in 2021). The biggest sovereign default is Greece, with $138 billion in March 2012 (equivalent to $173 billion in 2021).What happens if a country is in too much debt? ›
Excessive debt can undermine economic performance when it is followed by transfers that are economically suboptimal. More importantly, these transfers can set off financial distress behavior that undermines subsequent growth, in many cases substantially.What is a good credit score? ›
Although ranges vary depending on the credit scoring model, generally credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and up are considered excellent.What is the 11 word phrase to stop debt collectors? ›
If you are struggling with debt and debt collectors, Farmer & Morris Law, PLLC can help. As soon as you use the 11-word phrase “please cease and desist all calls and contact with me immediately” to stop the harassment, call us for a free consultation about what you can do to resolve your debt problems for good.What happens if you never pay collections? ›
If you ignore a debt in collections, you can be sued and have your bank account or wages garnished or may even lose property like your home. You'll also hurt your credit score. If you aren't paying because you don't have the money, remember that you still have options!Can I argue a default? ›
You can ask for an inaccurate default record to be updated or removed by raising a credit report dispute. Here's how to do this: Get your credit report to see the default entry. Get in touch to tell us how and why it should be changed.How do you challenge a default? ›
To do this, you'll need to contact the three main credit reference agencies and raise something known as a 'credit report dispute'. When you do this, the agency will contact the lender who issued the default to check that it should be removed. In the meantime, they will put a 'Notice of Correction' on your file.What are the main reasons of default? ›
Countries defaulting on their debts is rare. But it does happen. The most common causes of sovereign defaults include economic stagnation, political instability, and financial mismanagement.Will the stock market crash if the US defaults on its debt? ›
The stock market will certainly take a hit if the U.S. defaults on its debt. At moments, the losses could seem significant to anyone with investments or retirement accounts. But for those with diversified portfolios who aren't nearing retirement, investment experts advise that you stay the course.
On the one hand, they opposed Japanese incursions into northeast China and the rise of Japanese militarism in the area, in part because of their sense of a longstanding friendship with China. On the other hand, most U.S. officials believed that it had no vital interests in China worth going to war over with Japan.Why was the US unhappy with Japan? ›
The United States was particularly unhappy with Japan's increasingly belligerent attitude toward China. The Japanese government believed that the only way to solve its economic and demographic problems was to expand into its neighbor's territory and take over its import market.Why didn't the US want to invade Japan? ›
American war planners projected that a land invasion of Japan could cost the lives of up to a million U.S. soldiers and many more Japanese. These figures, Giangreco explains, were estimated based on terrain, the number of units fielded, and the number of enemy units they would have to fight.What happens if the stock market crashes do you lose all your money? ›
Do you lose all the money if the stock market crashes? No, a stock market crash only indicates a fall in prices where a majority of investors face losses but do not completely lose all the money. The money is lost only when the positions are sold during or after the crash.Who keeps the money when a stock goes down? ›
When a stock tumbles and an investor loses money, the money doesn't get redistributed to someone else. Essentially, it has disappeared into thin air, reflecting dwindling investor interest and a decline in investor perception of the stock.What happens if US stock market crashes? ›
Stock market crashes wipe out equity-investment values and are most harmful to those who rely on investment returns for retirement. Although the collapse of equity prices can occur over a day or a year, crashes are often followed by a recession or depression.What would happen if the US invaded Japan? ›
While the overall Japanese deaths attributed to the atomic bombs were between 129,000 and 226,000, the continuation of the war could have resulted in far, far greater numbers of Japanese deaths. The U.S. government estimated that invading the Japanese Home Islands would cost 5 to 10 million Japanese lives.Why doesn t Japan and China get along? ›
Since the end of World War II, Sino-Japanese relations are still mired with geopolitical disagreements. The enmity between these two countries emanated from the history of the Japanese war and the imperialism and maritime disputes in the East China Sea.Why did Japan invade China so easily? ›
Seeking raw materials to fuel its growing industries, Japan invaded the Chinese province of Manchuria in 1931. By 1937 Japan controlled large sections of China, and war crimes against the Chinese became commonplace.What was the main conflict between the US and Japan? ›
To a certain extent, the conflict between the United States and Japan stemmed from their competing interests in Chinese markets and Asian natural resources. While the United States and Japan jockeyed peaceably for influence in eastern Asia for many years, the situation changed in 1931.
Therefore they were stunned when the unthinkable happened and Japanese planes bombed the U.S. fleet at Pearl Harbor on December 7, 1941. The following day, the United States declared war on Japan, and it soon entered into a military alliance with China.What event caused Japan and the United States to have bad relations? ›
The Fate of the Pacific Fleet at Pearl Harbor. From mid-1940, when FDR moved the US Pacific Fleet from San Diego to Pearl Harbor, long-simmering tensions between the United States and Japan reached a new state of intensity. Japan had been embroiled in a brutal war of conquest in China since 1937.What would have happened if Japan never attacked the US? ›
At the most extreme, no attack on Pearl Harbor could have meant no US entering the war, no ships of soldiers pouring over the Atlantic, and no D-Day, all putting 'victory in Europe' in doubt. On the other side of the world, it could have meant no Pacific Theatre and no use of the atomic bomb.Why is the US protecting Japan? ›
The alliance began during the U.S. occupation after World War II. The United States pledged to defend Japan, which adopted a pacifist constitution, in exchange for maintaining a large military presence in the country.Why hasn t the US been invaded? ›
Many experts have considered the US practically impossible to invade because of its well-funded and extensive military, major industries, reliable and fast supply lines, large population and geographic size, geographic location, and difficult regional features.