Commentary
U.S. President Donald Trump has argued that China owes at least $10 trillion for the COVID-19 pandemic, and that all countries should cancel their debts to China as a down payment on the damages they sustained.
Trillions more should be demanded for years of intellectual property theft and military aggression against the United States and U.S. partners in Asia such as Japan, Taiwan, and the Philippines.
The Chinese military has shot military-grade lasers at U.S. airmen and shadowed U.S. sailors. In one case, a Chinese fighter jet forced a U.S. EP-3 surveillance plane to land on Chinese territory. The plane was taken apart, and some U.S. technology was lost to China.
Chinese intelligence, arms, and dual-use military equipment sales to U.S. adversaries in Russia, North Korea, and Iran have also entailed damages to the United States. In the case of Chinese support for Iran, it has included the loss of life by American service members. In the case of Russia, it included attacks on U.S.-supplied military technology to Ukraine with drones that used Chinese technology. China’s missile hardware has enabled North Korea’s threats against U.S. forces in Japan, South Korea, and Guam.
The threat of the Chinese regime’s further aggression and support for aggression has required increased U.S. defense spending that the regime in Beijing should repay.
China has the money. Its foreign exchange reserves alone were $3.4 trillion in September. China’s positive balance of trade with the world reached a record $1.2 trillion last year. And much of that money can be touched by the U.S. government.
Brad Setser, a former U.S. Treasury official, estimates that as much as 55 percent ($1.87 trillion) of China’s foreign exchange reserves is held in U.S. financial assets. He says China’s state commercial banks hold another $400 billion in foreign securities holdings. Much of that will be U.S. assets.
Add them together, and China holds approximately $2 trillion of U.S. assets that could relatively easily be frozen and (with the right legislation) confiscated by the United States and its allies. The Chinese Communist Party (CCP) controls additional assets in euros, sterling, and yen, much of which could be frozen by U.S. allies to at least partially repay parallel damages they suffered from the CCP.
China’s foreign exchange reserves have fallen from their 2014 peak, partly because it bought yuan to prop up its value relative to the U.S. dollar. They have only partially recovered, with much of China’s U.S. holdings now likely hidden in non-U.S. jurisdictions to make it more difficult to see and freeze the regime’s U.S. assets.
In early 2022, China held at least $1 trillion in U.S. Treasurys through U.S. custodians. Then, Russia invaded Ukraine, and its assets in the United States and Europe were frozen. Beijing took notice and likely worried that Washington would also freeze its assets, especially if China’s military invades Taiwan.
Beijing has supposedly been selling its U.S.-custodied U.S. Treasurys, which, by 2026, had fallen to $591 billion. It has been buying gold and short-term Treasurys, which are easier to offload.
According to Setser, Beijing has also been moving assets out of Euroclear, based in Belgium. This is despite the fact that a Chinese state agency owns an equity stake in Euroclear that arguably gives Beijing intelligence, warning, and influence if Euroclear is ever asked to freeze China’s assets.
Setser argues that Beijing may be shifting at least some of its long-term U.S. Treasury holdings to non-U.S. custodians in places such as the UK, France, Luxembourg, and Belgium. There are indicators that Beijing also buys other types of U.S. debt, he argues, and holds them in Canada and Europe. These include “Agencies” such as government-sponsored mortgage-backed securities.
“Sum up China’s holdings with the holdings of Canada and the European custodial centers, and an upper-end estimate for China’s true Agency holdings could be as high as $500 billion,” Setser writes.
That is in addition to the $591 billion in U.S.-custodied Treasurys, and an unknown quantity of foreign-custodied U.S. Treasurys. Setser notes that China is now likely “using multiple non-U.S. custodians to mask its true holdings” and argues that its holding of significant U.S. Agencies indicates that Beijing’s U.S. financial holdings are between 50 percent and 55 percent of its total reserve portfolio.
Beijing has long obscured its international asset holdings. This makes it harder to freeze China’s assets in case of war or increased economic sanctions. The CCP has few other options for the dollars it earns from an excess of exports over imports if it wants to hide its U.S. assets while using them to maximize yield.
U.S. debt gives China’s central bank a good balance between fungibility and yield. Treasurys are easy to move offshore and sell at a moment’s notice. China’s ownership of U.S. companies and real estate would be less liquid and, therefore, riskier during a war or under increased sanctions.
Could the United States selectively default on China-held debt?
A selective default on the debt might require a constitutional amendment, incentivize dedollarization, and raise U.S. interest rates.
A better route would be U.S. legislation that freezes assets under the CCP’s control, then confiscates those assets to pay for reparations. This would require enabling legislation, which Congress should explore if it can get past corporate lobbyists pushing for more trade with China.
Freeze-and-confiscate legislation would arguably cause less de-dollarization and a lesser rise in interest rates. And the benefits of hitting the CCP with a bill for its malicious activity outweigh the costs. U.S. taxpayers should be refunded for the trillions of dollars they lost from the CCP’s theft, COVID-19 pandemic, military threats, and material support to adversaries such as Russia, Iran, and North Korea.
The regime in China should not be allowed to steal from and otherwise harm America without paying the cost. If the CCP gets away without repercussions, it and other malign actors will do the same again.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.
