Could China Dump its US Treasuries?

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On so-called Liberation Day, Trump threatened to impose a 34% tariff on all Chinese imports entering the United States. This would be in addition to the 20% tariff he had already imposed a few weeks earlier. While this was already considered extreme, China, in a spirit of reciprocity, threatened to impose its own 34% tariff on all American imports into China. In response, Trump added yet another 50%.

There was some hope this was just a bluff, but on Wednesday morning, Trump raised the flat tariff rate on Chinese imports to an astonishing 104%. This means that if you're an American trying to import something from China, you now have to pay more in tariffs than you're actually spending on the product itself. The Chinese Communist Party (CCP) has insisted they won’t back down, but it’s clear that slapping tariffs on American imports isn’t changing Trump’s mind.

In this video, we’re going to take a look at China’s so-called “nuclear option” in this escalating trade war between the world’s two biggest economies—namely, dumping all its American bonds. We'll explore whether that could actually happen, and what it would mean for the global economy.

The US-China Trade Relationship

To understand this story, you need a bit of context. As you may already know, the US runs a massive bilateral trade deficit with China. In other words, the US imports far more from China than it exports to China. It also runs the largest overall trade deficit in the world, meaning it imports more than it exports in general. Meanwhile, China consistently runs the largest overall trade surplus. This dynamic is a defining feature of the modern global trading system: China exports more than it imports, and the US absorbs this surplus through massive consumer spending on Chinese goods.

Normally, trade deficits are temporary. Importing more than you export puts downward pressure on a country’s currency, which should eventually help balance trade. For example, when Argentina imports more than it exports, it sells its own currency (the peso) to buy foreign currencies, and uses those to purchase imports. Meanwhile, foreign buyers of Argentinian exports have to buy pesos, balancing the currency flow.

If a country is importing more than it exports, more of its currency is sold than bought, which should decrease the currency’s value. That, in turn, reduces imports and boosts exports until the trade account balances again.

Why the US Can Run Persistent Deficits

So, how does the US manage to run persistent deficits? This is a debated topic in macroeconomics, but one major factor is how China recycles its dollars. When China exports goods to the US, it receives US dollars. Normally, that would strengthen China’s currency (the yuan), eventually balancing trade. But China prefers to keep its currency devalued to maintain export competitiveness.

To do this, China's central bank prints more yuan and uses it to buy dollars in the currency markets. This strengthens the dollar and weakens the yuan. As a result, China ends up with a massive stockpile of US dollars, which it uses to buy US government debt—primarily in the form of Treasury bonds.

Today, China holds roughly $800 billion worth of US Treasuries, making it the second-largest foreign holder of US government debt after Japan. While this is down from the $1.3 trillion it held in the early 2010s, the actual number might be higher, as China has moved much of this debt off official books and onto state-affiliated entities.

China has also started buying other forms of US debt like mortgage-backed securities from Fannie Mae and Freddie Mac—both government-backed institutions. This debt is indirectly guaranteed by the US government.

The Logic Behind China’s Investments

Why would China lend billions to the US government? For one, US Treasuries are considered the world’s reserve debt instrument: they’re highly liquid and relatively safe, even during crises. They also pay decent interest rates.

Additionally, lending to the US keeps the dollar strong, which supports American consumer demand for Chinese goods. This helps perpetuate the US trade deficit while deepening US reliance on Chinese manufacturing. Over time, this has created a mutual interdependence between the two nations—nicknamed “Chinmerica.” China relies on US consumers to buy its goods, and the US relies on China to fund its debt.

Could China Dump Its Treasuries?

Now that Trump is weaponizing China’s reliance on US consumers, many wonder: could China retaliate by dumping US treasuries and destabilizing America's debt market?

There are reasons to be skeptical. Selling dollar-denominated assets would strengthen the yuan, making Chinese exports less competitive globally. Additionally, there aren’t many alternatives where China could park such large sums of cash.

More importantly, dumping US bonds could cause a global financial meltdown. China may only hold a fraction of the Treasury market, but doing this during a sensitive time—like the present, where the US is already near debt crisis territory—could push borrowing costs even higher. Treasuries are currently being sold off at record rates, which is driving yields (interest rates) to recent highs.

If China dumped its holdings now, it could be the final blow that tips the US into a full-blown default crisis. This wouldn’t just be terrible for America—it would be catastrophic for the global economy, including China.

This is precisely why China refused a Russian proposal to sell off mortgage-backed securities to worsen the US economic crisis back in 2008. Still, if Trump continues escalating the situation, the CCP might conclude that if a global crisis is inevitable, they’d rather it happen on their terms.

Final Thoughts

This is a story worth watching in the coming weeks. With global geopolitics in flux and Trump upending the international order, there’s a lot to keep track of.

Every day brings bizarre headlines—from Elon Musk labeling critics as terrorists to Trump threatening war on Jupiter to win alien support (okay, that one’s fake). But if you want to dive deeper into the real and surreal of US politics, check out the series WTFUSA. It takes a light-hearted but thoughtful approach to explaining the chaos behind the headlines.

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