Why is China Funding the Pentagon's Budget?

According to the US Treasury, the annual budget deficit of the United States federal government in 2025 was $1.78 trillion. The Pentagon budget for 2025 was $849.8 billion, but now President Donald Trump is proposing to increase that to roughly $1 trillion in fiscal year (FY) 2026.

Again, according to the US Treasury, China and the Hong Kong SAR (Special Administrative Region) owned a combined total of $938.6 billion in US Treasury securities in late 2025. Mainland China held $682.6 billion, and the Hong Kong SAR $256 billion. The amount held in US Government bonds in Russia in 2025, in contrast, amounted in value to a paltry $31 million. 

This leads us to two observations: the first is, that it is hardly a wise course for the Trump Administration to pursue a foreign policy based on nineteenth-century Palmerstonian 'gunboat diplomacy', of the kind recently displayed in Venezuela, on the basis of money largely borrowed from one of the USA's principal adversaries, and nor is it a wise course for it to antagonise its NATO allies, as it has done over Greenland, while actually praising the leaders of Russia and China.

The second is to wonder what logic lies behind the Chinese Communist Government's decision to invest so heavily in the US Government, and provide the money to pay for all the soldiers, sailors, air-force personnel, marines, guns, bullets, bombs, tanks, jet fighters, missiles, etc., that would be pointed at China in the event of a Sino-American war. On the face of it, it seems quite insane.

The US spent 3.2% of its GDP on defence in 2025, compared with China's 2.4%, or would have done had not every single cent of that expenditure been borrowed money. Why does China spend more money defending the US than itself, or apparently so? In fact, this is not the case, as we shall see.

The Chinese economy is the world's largest, in terms of purchasing power parity, $43.125 trillion for 2025, 19.84% of global GDP (PPP). China also had a trade surplus with the rest of the world in 2025 of $1.189 trillion. 2.4% of $43.125 trillion is $1.035 trillion, so, in terms of purchasing power parity, at least, and in 2025, Chinese defence spending exceeded that of the United States.

However, according to SIPRI, China had only 600 nuclear warheads in its arsenal in January 2025, compared to the USA's 3,700 and Russia's 4,309.

China and its allies in the BRICS have been attempting to oust the US dollar from its role as the international trading currency. (For more on this, see Almeida, 2025.) They would have little chance of success, had they not such an ally as Mr Trump, whose erratic economic policies have 'spooked' investors to such an extent that the price of gold has now risen to $176.39 per gram, or $5,454 per troy ounce. The dollar, meanwhile, is declining against other major currencies, which appears to be deliberate policy by the US Administration, which is threatening the independence of the US Federal Reserve in order to control monetary policy and reduce interest rates, in order to bring about dollar depreciation.

Mr Trump does not know his history: competitive currency devaluations accompanied tariff wars between countries in the 1930s. These policies did nothing to improve the economies of the countries that practised them - rather, the reverse.

All this does not answer the question of why China is funding the Pentagon's budget. Mainland China has been reducing its holdings of US Treasury bonds in recent years, from $768.6 billion in November 2024 to $682.6 billion in November 2025, a reduction of ~11.2% in one year. Hong Kong's holdings were reduced, over the same period, from $265.8 billion to $256 billion, a reduction of ~3.7%. China held $3.358 trillion in foreign exchange as of December 2025. 8.3% of the November 2025 foreign exchange total consisted of gold, 2,305 tonnes of it. $682.6 billion in US Treasuries would constitute ~20.33% of China's foreign exchange total. The bulk of the remainder is held in the form of Euros, Japanese Yen and Pounds Sterling.

Rising long-term US interest-rates, a falling dollar, and a rising gold price, signify what the economist Paul Krugman terms the 'debasement trade'. It is, he tells us, 'essentially how markets respond to the increased possibility of crazy American policy.'

The Chinese appear to be doing what the Emperor Napoleon advised: 'Quand l'ennemi fait un faux mouvement, il faut se garder de l'interrompre.' Donald Trump is making mistakes aplenty, so why interrupt him? For the time being, they need dollar assets, but they are reducing their exposure to the dollar itself and to US Treasuries as fast as is consistent with prudence, so as to 'safeguard the safety and liquidity of assets while ensuring yields' (Global Times).