The Dangers of U.S. Debt Ownership by China on National Security

The United States and China are two of the world’s most powerful countries, economically, militarily, and politically. While they have long been competitors, the economic relationship between the two nations is uniquely interdependent. One of the most significant aspects of this relationship is China's large ownership of U.S. debt, which has raised concerns regarding its potential implications for U.S. national security. The scale of Chinese debt ownership, the economic leverage it grants, and the strategic risks posed by China's growing financial stake in the United States have raised alarms within the U.S. government and security community.

As of recent data, China holds over $1 trillion in U.S. Treasury securities, making it the second-largest foreign holder of U.S. debt, behind only Japan. This ownership represents a significant portion of the United States' total debt, which exceeds $31 trillion. U.S. Treasury bonds are considered one of the safest investments globally, but China’s significant holdings create a dependency that raises important national security questions. For years, China has used its massive foreign currency reserves to purchase U.S. debt as a way to manage its own currency value and keep its exports competitive. In return, the U.S. government has benefitted from lower borrowing costs, as the demand for Treasuries has helped to keep interest rates low. However, the scale of China's holdings in U.S. debt creates a situation in which the United States is financially vulnerable to decisions made in Beijing, which can have far-reaching consequences for national security.

The most direct risk of China’s debt holdings is the potential for economic leverage. Although it is unlikely that China would suddenly sell off its entire U.S. debt portfolio — doing so would harm China’s own financial interests — the mere ability to influence the bond market could be used as a strategic tool. If China were to decide to reduce its holdings of U.S. Treasury bonds, it could lead to a significant drop in bond prices, which would push interest rates higher. This could result in increased borrowing costs for the U.S. government and could destabilize financial markets globally. Such an economic shift could weaken the U.S. economy, reducing its capacity to project military and diplomatic power abroad. Moreover, rising interest rates could stifle economic growth, undermining the nation’s overall ability to fund defense programs and maintain its strategic capabilities.

In extreme scenarios, the threat of China dumping U.S. debt could be used to exert economic pressure on the U.S. government, particularly in times of geopolitical tension. This form of "economic coercion" could compel the U.S. to reconsider certain policies or military stances that are perceived as counter to Chinese interests. For example, China has increasingly used economic tools to secure its objectives in regions like Africa, Latin America, and the South China Sea. If China were able to leverage its ownership of U.S. debt to exert influence over U.S. decisions, it could have serious implications for American foreign policy, especially in areas that directly impact national security.

In addition to economic leverage, China’s significant holding of U.S. debt may grant it geopolitical leverage. A nation’s economic clout can often translate into political influence, and China’s role as a major creditor to the U.S. strengthens its position on the global stage. The U.S. may find itself in the difficult position of making concessions in trade or diplomatic matters to avoid actions that could destabilize its economy. China has been known to use its financial resources to influence foreign governments and pursue its strategic goals, such as its Belt and Road Initiative (BRI), which aims to build infrastructure projects in developing countries while expanding Chinese influence. If China were to use its ownership of U.S. debt to leverage American foreign policy decisions, this could limit the U.S.’s ability to respond to Chinese expansionism and could undermine American influence in international forums.

Furthermore, China’s control over a significant portion of U.S. debt could affect American defense spending priorities. In a scenario where the U.S. is under economic pressure from rising interest rates or the threat of a debt sell-off, Washington could be forced to cut spending in areas that are vital for national security, such as military modernization, research and development, and intelligence capabilities. This would weaken the U.S. military’s ability to project power globally, leaving the U.S. more vulnerable to threats from adversaries like China, Russia, and others.

Another aspect of national security that is impacted by U.S. debt ownership by China is the role that debt holders play in shaping technological and supply chain dynamics. China has made significant strides in advancing its technological capabilities, particularly in areas such as 5G, artificial intelligence, and semiconductors. Its financial stake in the U.S. economy provides it with not only economic influence but also access to key American technologies and industrial sectors. In a scenario where the U.S. faces heightened competition with China in the technological and military sectors, the fact that China holds significant economic sway over the U.S. could become a vulnerability. China’s ability to influence global supply chains or restrict access to critical raw materials and manufacturing processes could have serious implications for U.S. national security, particularly in areas that are crucial for defense, such as semiconductors or rare earth minerals.

One of the broader risks posed by the Chinese ownership of U.S. debt is the over-reliance on foreign creditors to finance domestic spending. While the U.S. has long been the world's largest debtor nation, the fact that a foreign government — especially one with strategic and military ambitions counter to those of the U.S. — holds such a large portion of that debt is troubling. It creates an inherent conflict of interest, where the financial health of the U.S. becomes partially dependent on the stability and interests of a foreign power. This over-reliance on China as a creditor also exposes the U.S. to broader shifts in the global economic order. For example, if China were to move away from holding U.S. debt in favor of other assets or investments, it could destabilize the bond market, triggering a ripple effect that could reverberate throughout global financial systems. The U.S. could find itself scrambling to find new sources of credit, potentially at much higher costs, weakening its ability to maintain both its defense and domestic programs.

In recent years, tensions between the U.S. and China have escalated over issues such as trade imbalances, intellectual property theft, military posturing in the South China Sea, and Taiwan’s status. This has led to concerns that the U.S. and China may be heading toward a period of strategic decoupling, where the two nations reduce their economic interdependence and increase their competition on the global stage. In such a scenario, the U.S. may face the challenge of extricating itself from its financial dependence on China without causing economic turmoil. At the same time, China may seek to reduce its exposure to U.S. debt, possibly by diversifying into other currencies or assets, further diminishing U.S. economic leverage in the process. This decoupling could have profound consequences for national security, as the U.S. could find itself increasingly isolated in a world where China’s influence in global markets continues to grow.

While U.S.-China economic relations have benefited both nations in some ways, the massive ownership of U.S. debt by China poses clear risks to U.S. national security. Economic leverage, geopolitical manipulation, and the threat of strategic decoupling all contribute to the growing vulnerability of the United States in an era of heightened global competition and military rivalry. As such, U.S. policymakers must carefully consider the long-term implications of this economic interdependence, looking for ways to reduce reliance on foreign creditors and strengthen national security without undermining the nation's financial stability. The relationship between the U.S. and China is complex, but one thing is clear: managing U.S. debt and its implications on national security will be crucial in navigating the challenges of the 21st century.