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China is taking many hits from Trump. So why doesn't it hit back at Trump's weakness, the US Treasury bond market? It may well do so at some point, but China is playing a longer game, one focused on its own self-interest

Bonds / opinion
China is taking many hits from Trump. So why doesn't it hit back at Trump's weakness, the US Treasury bond market? It may well do so at some point, but China is playing a longer game, one focused on its own self-interest
tension between China and the US

Although they peaked at over US$1 tln representing the US's largest foreign creditor, and have fallen since during the Biden presidency to about US$780 bln to be the second largest (after Japan), China's holding of US debt securities is still massive, and a potential tariff-war response lever.

But China has not yet resorted to using that power.

Waiting has given them more insight on how to use it. When Trump blinked in the face of a bond market warning, and put off the implementation of additional tariffs for most countries (except China), Beijing's asset managers got a great insight into how the bond market would respond.

Current estimates are that for every percentage point rise in the yield on US Treasuries, it will cost the US government approximately US$100 bln per year.

The Trump policies of tax-cuts-for-the-rich, in combination with a recession, clearly mean US Treasury issuance is going to explode - just like it did in the first Trump administration. The US Treasury will issue at least US$2 tln in new debt this year alone, as well as roll over US$8 tln in maturing bonds. In out years, investors can see this being a low point.

In their naivety, US Treasury Secretary Bessent said their are on track to reduce their deficit to 3% of GDP by 2028. But the Congressional Budget Office forecasts that the US deficit will be 5.2% - 6.2% from 2025 - 2028 - at the very least two percentage points higher than the target. No-one credible believes Bessent (and probably not Wall Street veteran Bessent himself either).

Trump’s chaotic policymaking has exposed his core weakness. US Treasuries are fast shedding their status as the world’s leading safe haven asset. America's backyard is on fire. China will find use for its US$780 billion arsenal.

It is that alternative use in the next few years that may explain why Beijing has not moved to accelerate the fall in value of the US position. Beijing seems to view this as a double-edged situation. They currently appear more preoccupied with preserving the value of China’s foreign reserves, which would take a major hit as a direct consequence of any sharp decline in US Treasury values or the US dollar.

Dumping their US holdings would likely cause a surge in the yuan and a decrease in its use for export competitiveness.

Then again, a stronger yuan would support lower prices for internal consumption, which is a clear, well-articulated policy goal of Beijing. But a disorderly and fast unraveling of the US positions is not in their interests even if it is over a longer timeframe.

But China is aware of the risks of holding US dollar securities. Trump is unstable, in their view, and holding such a large proportion of their assets in US dollars isn't ideal. The Americans point out that "there is no alternative". But they are blinded by their own rhetoric. There are always alternatives, even at scale. But China is being challenged to find or develop them. And that won't be easy, even if they think it is necessary.

Meanwhile, the US Treasury market is becoming more brittle. High-velocity traders and hedge funds as key “shadow dealers” on the US debt markets are rising in importance as buyers, despite suffering from weak capital foundations and limited ability to bear risk. In contrast, the role of more traditional investors such as foreign monetary authorities, insurance companies and pension funds, are all showing less appetite to bid or buy Bessent's new debt.

If you add into the equation the mystical, magical "Mar-a-Lago Accord", the threat is that holders of US Treasuries that pay interest would be forcibly swapped out for US "century bonds", ones that pay no interest. Not too many investors, either in the US or outside, would sign up to that, even in the face of tariff threats.

So, what is China to do? They haven't tipped their hand but they are clearly working on it, having started in the first Trump presidency. One thing they almost certainly won't do is call Trump to negotiate tariffs. They see this as almost a unique opportunity to fast-track a new world financial order.

China has its own issues. And they too are costly. So having their US Treasury asset worth something is helpful in the short run at least. They will let their US exposures slip monthly until they are minor and manageable.

China is not voting for chaos, even if Trump is. The referee is the bond market.


The US moves and consequences are plain for all to see. But Chinese policy and actions are less clear. If you have insights into actual Chinese policy moves, please note them in the Comment section below.

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12 Comments

Great insights. Let me suggest that China is playing their hand well given the dreadful cards dealt. 

Dumping their US holdings would likely cause a surge in the yuan and a decrease in its use for export competitiveness.

But that's not happening yet, despite the dumping of US debt which has been going on for quite some time. 

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I agree with David that ' They will let their US exposures slip monthly until they are minor and manageable.' is a likely way for China to reduce its risky exposure to the US$.

The fact that China can produce goods at lower cost than other countries is in my opinion going to strengthen its economy more and more into the future relative to other countries and the USA in particular. Better lower cost automation in the USA than in China could turn the tide for the USA but it is punching holes through the sides of its boat and doesn't appear to have any industrial policy or forward planning.

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From Grok:

As of January 2025, China holds approximately $760.8 billion in U.S. Treasury securities. With total U.S. Treasury securities outstanding at around $35.5 trillion, China's share is roughly 2.1% of the total U.S. debt.

My point is, China's holdings are not significant. The US Fed can print their holdings in a day.

China has no power over US treasuries!

 

 

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The Fed does not print Treasuries. It buys and sells existing Treasury securities in the open market as part of its monetary policy operations.

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Was watching Bloomberg last week and one of the talking heads said if China sells $200B in Treasuries, the US10Y’s going well above 5%.

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Todays article on Trump tariffs effect on US mfg isn't open for comments so posting this canary in the coalmine here

"A second Boeing jet intended for use by a Chinese airline was heading back to the US on Monday (Apr 21), flight tracking data showed, in what appeared to be another victim of the tit-for-tat bilateral tariffs launched by President Donald Trump in his global trade offensive...

A Chinese airline taking delivery of a Boeing jet could be crippled by the tariffs, given that a new 737 MAX has a market value of around US$55 million, according to IBA, an aviation consultancy."

https://www.channelnewsasia.com/world/second-boeing-jet-starts-return-c…

 

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So how are China going to maintain their existing Boeings? They need parts and access to Boeing software. I expect Boeing could ground all Chinese Boeings at a flick of a switch, never mind from lack of parts.

But would Boeing dare?

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Also keep in mind foreign holdings of USD1.32 trillion of Mortgage Backed Securities. The offloading of which will further drain liquidity out of the US market and affect US home loan rates.

Foreign governments collectively hold about $1.3 trillion in U.S. mortgage-backed securities, according to recent data. China — along with Japan, Taiwan, and Canada — is among the largest international holders.

In late 2024, China reportedly reduced its MBS exposure by 8.7% year-over-year, and by early 2025, that decline had reached 20%. Analysts believe this trend could continue—whether as part of a strategic economic rebalancing or in response to shifts in trade and monetary policy.

https://themortgagereports.com/119000/china-mortgage-backed-securities-…

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The summary is simple.

There are too many proxies

Not enough chairs

And the music will stop soon. 

Bluffing vs bluffing, but they're all in the same boat and it's lower in the water, every day. 

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H.L. Mencken

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I like it -

Mencken's quote, "To every complex question there is a simple answer—and it's clever, neat, and wrong!"

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