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The U.S. Is Borrowing Less From China, More From Everybody Else

In popular U.S. mythology, China is the creditor-bogeyman. Japan is the place where robots take care of old people.

Mythology notwithstanding, Japan is about to pass China as the biggest foreign lender to the U.S. government.

In fact, the U.S. government is actually borrowing less money from China than it was a year ago — even as it's borrowing more than ever the rest of the world. (The latest numbers are here.)

There are a few factors at play here.

1. 'The U.S. Is Still King Of The Hill'

If you're a government anywhere in the world and you have some extra foreign currency laying around, there's a very, very good chance you're going to turn that currency into dollars and lend them to the U.S. government.

Despite what you may have heard, U.S. Treasury bonds are widely seen as one of the safest, most liquid investments in the world, and the dollar is the de facto global currency. "The U.S. is still king of the hill," Eswar Prasad, a Cornell economist and trade expert, told me this morning.

That's a big part of the reason the U.S. government can borrow money essentially for free right now.Countries around the world feel like they have to keep buying U.S. bonds, no matter how low the interest rate. (Roughly half of U.S. government debt held by the public is held overseas.)

2. Japan and Switzerland Hate Being Safe Havens

Up until a few years ago countries looking to park foreign cash somewhere safe would put a big chunk in U.S. bonds, a decent-sized chunk into bonds of eurozone countries and maybe a little bit in Swiss and Japanese bonds.

These days, many European bonds seem a lot less safe. (Italy is the biggest government bond market in the eurozone.) So as governments shy away from the eurozone, they're putting more and more money into Switzerland and Japan.

For reasons we explained here, this is making Swiss and Japanese exports more expensive — a huge blow to both countries, which depend heavily on exports. "Their domestic manufacturing is getting hammered," Prasad said.

To fight this trend, both countries have been taking some of this money that's coming into their countries and sending it back out — in part by lending it to the U.S. government.

3. China Is Now Importing Almost As Much Stuff As It's Exporting

For years, China was exporting far more than it was importing, and was keeping the value of its currency artificially weak. In order to do these things, China had to keep lending more and more money to the U.S. government.

Recently, though, China's trade surplus has shrunk dramatically. And its currency may be approaching fair market value, Prasad said.

In other words: China doesn't need to keep lending more and more money to the U.S. to keep its economy going.

Copyright 2021 NPR. To see more, visit https://www.npr.org.

Jacob Goldstein
Jacob Goldstein is an NPR correspondent and co-host of the Planet Money podcast. He is the author of the book Money: The True Story of a Made-Up Thing.