China has been told not to retaliate against President Trump’s active new tariff regime by unloading its massive holdings of U.S. government bonds – an action warned by analysts could hurt its own economy rather than hurting Washington.
Earlier this month, Trump imposed widespread tariffs of up to 145% on China's exports to the United States, raising concerns about a new economic confrontation between the world's two largest economies. The sharp escalation has led to speculation that Beijing could fight back by selling most of its U.S. treasury, a strategy that could undermine U.S. financial markets by raising bond yields.
However, analysts are urging restraint, warning that such moves will bring serious financial and strategic drawbacks to China itself.
“It is worrying that China may abandon its huge Treasury bonds, even if it has the potential to cause significant side effects, such as causing huge losses on its own portfolio and undermining its competitiveness with the United States by pushing to drive the company [yuan] John Higgins, chief market economist at capital economics, said.
China is the second largest foreign holder of U.S. government debt after Japan, with a longer date of more than $700 billion. By comparison, Japan holds more than $1 trillion. If Beijing drastically reduces its holdings, it could trigger panic in global markets that are already at an advantage in the protectionist policy of the U.S. government.
The shift has attracted attention among analysts since October last year as bond yields rise, which has soared to levels never seen before. It is reported that as some hedge funds are forced to liquidate the treasury amid surge in volatility, speculations about China's participation are still inconclusive.
Data from the U.S. Federal Reserve and Treasury Department show that China sold about $5 billion in U.S. bonds in February, ahead of Trump's announcement on April 2 in what Trump called “Liberation Day.” Recent moves are harder to determine, although analysts currently have no evidence that the massive sell-off in Beijing this month is difficult to prove.
According to Barclays, any bond sales in China are more likely to be related to currency stability efforts than deliberately putting pressure on U.S. borrowing costs. This distinction is crucial as the Chinese authorities face constant pressure to defend the yuan in the face of rising tariffs – but any major treasury clearance can have the opposite effect by strengthening the currency and eroding export competitiveness.
The central bank and state-managed investment funds also hold about $3 trillion in assets denominated in USD. The collapse of the U.S. bond market will severely undermine the value of these holdings, undermining China's wider financial stability at a time when growth has slowed.
Meanwhile, traditional havens such as U.S. bonds and the dollar have failed to provide shelter in the latest round of market turmoil. Both are on par with U.S. stocks, indicating a broader crisis of confidence for dollar-based assets.
As the deadlock between Washington and Beijing intensifies, policymakers in both capitals may be forced to weigh short-term leverage against long-term economic consequences. Analysts say Treasury bills may end up being more symbolic than valid and potentially self-destructive for China.
