Since December, 2008, China has been the largest holder of US debt. However, as of October, 2016, this is no longer the case.

China’s currency, the renminbi (RMB), has hit an 8-year low, and China has been selling off US debt and buying RMB on world markets in order to drive the value back up. Through October, 2016, China had liquidated $41.3 billion of US debt, which left them holding only $1.12 trillion. In contrast, Japan holds $1.13 trillion (Mullen 2016).

There has been growing concern in the US over the fact that China holds so much debt, as this may give China strategic leverage over the US. This concern over China holding US debt is not shared by US President-elect Trump. Trump believes that China holding US debt gives the US an advantage over China.

Trump’s opinion may come from an incident that occurred during Trump’s storied business career. According to a 2016 Innvestopedia article titled “This Is How Donald Trump Actually Got Rich”, in the early 1990s, when his debt-ridden Taj Mahal Casino had to file for Chapter 11 bankruptcy protection, the casino owed $975, nearly $10 of which was guaranteed by Trump personally. Rather than allow the property to be foreclosed on, Trump renegotiated the financing and walked away with a 5-year deferment of payments. What’s more, he convinced his creditors to loan him an additional $56 million, which he invested in other projects that soon earned him a tremendous profit.

In any analysis of which countries have diplomatic, economic, or financial leverage over the US, it is important to keep in mind that while China has typically held around 20% of US foreign debt, this only represents 6.8% of total US debt. While the fact that China owns a considerable amount of US debt has received significant coverage in the media, it is worth noting that other Asian countries, most notably Japan, are also large holders of US foreign debt. However, this foreign debt makes up a minority of total US debt. Around 66% of all total US debt is held domestically, with the federal government, (which includes programs such as Social Security), and banks holding the largest percentage.

From this perspective, the amount of leverage any single foreign debt holder, including China, would have over the US is questionable. President-elect Donald Trump may be taking this into account when talking about his US-China trade policies. As CNN notes, “Trump has suggested he will take a more confrontational stance toward China on trade, threatening to slap tariffs of as much as 45% on Chinese goods”.

Over the last ten years, China has been purchasing US debt in order to devalue the RMB, thereby keeping Chinese exports cheap. This strategy has resulted in the Chinese economy growing at record pace.

Another consequence of China purchasing US debt is that it has kept US interest rates down.

As the Chinese economy has slowed down, more and more Chinese people and companies are moving their money out of China, which has devalued the RMB even further. This capital flight is not restricted to the wealthy elite or to major Chinese state-owned enterprises, but also effects both middle-class Chinese and medium-sized businesses.

Since the election of Donald Trump, the dollar has soared, sending the RMB down even more.

Basic macroeconomic fundamentals would suggest that a sell off of US debt could result in a crash of the US Dollar, an increase in the US interest rates, and a dip in the US stock market. However, in the case of US debt, basic macroeconomic fundamentals do not seem to apply.

China has engaged in two recent major selloffs. In August of 2015, and in January of 2016, the US economy remained unaffected. The reason seems to be because the US bond market is incredibly liquid. When debt is offered for sale, it is instantly purchased. Others predicted that the US budget deficit would cause the world to drop US debt, but US debt remains the currency reserve of choice around the globe, as most countries use US debt to support their own currencies. As a result, demand for US debt is always high.

In addition, US debt remains attractive as an investment vehicle. Compared with the sovereign debt of other nations US debt generally gives higher rates of interest and carries less risk. In contrast to the relative stability of the US, interest rates for European sovereign debt have in recent years occasionally gone negative. A good example of this is Sweden in 2015 and again in 2016. By comparison, US debt remains a much more attractive option for investors.