China Unlikely to Sell US Treasury Bonds on Large Scale Despite Trade Tensions

Trade War Escalation Raises Bond Market Questions

As US-China trade tensions intensify under President Donald Trump's expanded tariff policies, speculation has emerged about China's potential to retaliate by selling its massive holdings of US Treasury bonds. However, financial experts argue that practical constraints and economic risks make such extreme measures unlikely, despite growing anti-tariff sentiment in China.

China's Treasury Holdings as Economic Leverage

China currently holds approximately $780 billion in US Treasury securities, making it the second-largest foreign holder after Japan. This substantial position has led some analysts to suggest that China could weaponize these holdings to pressure the US economy by triggering bond market instability. The theoretical impact of such a move would be significant. A large-scale sell-off could potentially drive up US interest rates, increase borrowing costs for the federal government, and create broader financial market volatility. However, the reality of implementing such a strategy presents numerous challenges.

Dollar Dominance Creates Constraints

The fundamental obstacle to China's use of Treasury bonds as an economic weapon lies in the entrenched nature of the dollar-centric international financial system. Despite China's efforts to promote alternatives, the US dollar remains the world's primary reserve currency and medium of international trade. Financial analysts note that increasing gold reserves or promoting alternative currencies cannot immediately replace the practical infrastructure that supports dollar dominance. The vast majority of international trade continues to be denominated in dollars, and China's own economy remains deeply integrated into this system. The yuan's limited international acceptance further constrains China's options. While Beijing has made significant efforts to internationalize its currency through initiatives like the Belt and Road Initiative and bilateral trade agreements, the yuan still accounts for a relatively small percentage of global reserves and transactions.

Self-Inflicted Economic Damage

Experts emphasize that aggressive Treasury bond sales would likely harm China's own economic interests. The immediate impact would include substantial losses on China's bond holdings as prices decline, representing a direct financial cost to Chinese government reserves. More broadly, destabilizing the dollar could undermine China's export competitiveness. A weaker dollar would make Chinese goods more expensive for American consumers, potentially reducing demand for Chinese exports at a time when China's economy is still recovering from pandemic-related disruptions. The move could also damage China's reputation as a responsible economic actor in international markets. Such weaponization of financial holdings might prompt other countries to reconsider their economic relationships with China, potentially isolating Beijing from global financial networks.

Bitcoin as Alternative Reserve Asset

Some proponents have suggested that China could shift toward alternative reserve assets like Bitcoin, but experts view this as politically motivated rather than economically sound. The proposal to make Bitcoin a national reserve asset is often seen as a form of political patronage to new elite groups rather than a serious monetary policy consideration. Bitcoin's volatility and regulatory uncertainty make it unsuitable as a primary reserve asset for major economies. The cryptocurrency market's relative immaturity and susceptibility to manipulation present risks that no major central bank has been willing to accept for large-scale reserves.

Alternative Response Strategies

Rather than dramatic Treasury sales, China is more likely to pursue gradual, strategic adjustments to its dollar exposure. These might include reducing new Treasury purchases, diversifying reserve holdings across multiple currencies and assets, or accelerating the development of alternative payment systems. China's Regional Comprehensive Economic Partnership (RCEP) and Belt and Road Initiative represent long-term strategies to reduce dollar dependence by creating alternative trade and financial networks. These approaches allow China to gradually reduce its vulnerability to US economic pressure without triggering immediate market disruptions.

Global Financial Stability Considerations

The interconnected nature of global financial markets creates additional constraints on extreme Chinese actions. China's economy is deeply integrated into global supply chains and financial networks, meaning that major disruptions to international financial stability would inevitably affect Chinese economic interests as well. Post-pandemic economic recovery remains fragile in many regions, including China. Introducing additional volatility into global financial markets could undermine recovery efforts and potentially trigger broader economic instability that would harm China's growth prospects.

Market Analysis and Future Outlook

Financial market analysts suggest that China's most likely approach will involve measured, strategic adjustments rather than dramatic confrontations. This might include gradually reducing Treasury holdings while simultaneously building alternative financial infrastructure and partnerships. The development of China's domestic financial markets and the internationalization of Chinese financial institutions provide alternative pathways for reducing dollar dependence without triggering immediate market crises. These longer-term strategies align better with China's overall economic development goals.

Implications for Global Economics

The debate over China's Treasury holdings highlights broader questions about the future of international monetary systems. While the dollar's dominance remains secure in the near term, the underlying tensions driving these discussions suggest that gradual changes in global financial architecture are likely to continue. For policymakers and investors, the key takeaway is that while dramatic Chinese retaliation through Treasury sales remains unlikely, the underlying economic competition between the US and China will continue to shape global financial markets in more subtle but significant ways. The analysis suggests that both countries have strong incentives to avoid actions that could destabilize global financial markets, even as trade tensions persist. This mutual dependence provides a stabilizing factor that makes extreme economic warfare scenarios less probable than political rhetoric might suggest.

Original: https://trendy.storydot.kr/economy/china-us-treasury-bonds-analysis