Filenews 11 April 2025
As the U.S.-China trade war flares up, the possibility of China activating an economic weapon with potentially serious consequences for the United States is coming back to the fore: the mass sale of U.S. government bonds, a strategy that has been characterized as a "nuclear option."
The threat has been discussed for years in international financial markets, but Donald Trump's recent imposition of 145 percent tariffs on Chinese imports and Beijing's silence on the next steps heighten concerns.
According to official data as of January 2025, China holds about $761 billion in U.S. government debt. Robin Brooks of the Brookings Institution estimates that the total amount is as high as $1 trillion. If indirect investments through European portfolios are also taken into account.
Economic pressure with global implications
A large-scale bond sale could drive down prices, skyrocket yields, and significantly increase borrowing costs for the U.S., with direct effects on the sustainability of public debt.
However, such an action would not be without cost to Beijing. Mark Williams of Capital Economics points out that "it would be like throwing a grenade at someone sitting across from you – only the table is small."
China has more than 3 trillion dollars. dollars in dollar-denominated assets, mainly through state-owned banks and investment vehicles. A sharp sell-off would lead to a weakening of the dollar, negatively affecting the value of China's own remaining reserves.
Monetary constraints and investment dilemmas
If bond sales were repatriated, the yuan would strengthen, hurting Chinese exports. At the same time, there are no immediate alternative investment options of the same security and liquidity as US bonds.
The bonds of Germany and Japan do not offer the same return, while the euro has yet to replace the dollar as the dominant reserve currency.
Indirect moves in Asian hours
Although there are no official announcements, observers point to moves that may indicate a trial sale. In the week that the U.S. announced new tariffs, the yield on the 10-year U.S. bond rose from 4.1 percent to 4.5 percent, mainly during Asian trading.
China can leverage platforms such as BrokerTec and CME Globex to carry out low-liquidity operations, causing excessive market movements without the need for an official announcement – a strategy of "subcutaneous" pressure.
The hidden front of mortgage securities
In addition to government bonds, Beijing also maintains significant exposure to the mortgage mortgage securities (MBS) market. According to the data, by January 2025, foreign countries held 1.32 trillion dollars. in MBS, with China, Japan and Taiwan in the top positions.
The sale of these securities could lead to a rise in mortgage rates in the US, negatively affecting the housing market and consumer demand.
Guy Cecala of Inside Mortgage Finance says: "If China wanted to hit us hard, it could get rid of MBS. Is it a threat? Yes, it is."
Low-intensity Cold War
The essence of the threat lies not only in a possible mass divestment, but in the uncertainty that is created around it. Keeping the threat low but steady reinforces geopolitical pressure without causing an open rupture.
The power play has shifted: from tariffs and exports, to borrowing costs and market liquidity. And China, holding a crucial tool in its hands, may not have to use it – as long as it continues to remind it of its existence.
