China Faces Critical Decision Over US Bond Holdings As Trade War Intensifies

Beijing confronts a pivotal choice regarding its massive US treasury holdings amidst escalating trade tensions with Washington. The world’s second-largest economy must weigh the risks of economic turmoil against accepting substantial losses on its $700 billion investment in US government bonds.

The situation has intensified following President Trump’s implementation of a 145 per cent tariff on Chinese goods exports to the United States. Market analysts are closely monitoring foreign holdings of US treasuries, which have experienced unprecedented price declines in response to the global tariff measures.

Recent data from February revealed that whilst foreign investors increased their treasury holdings overall, China reduced its position by approximately $5 billion. This reduction occurred just two months before Trump’s significant “liberation day” tariff announcement on 2 April.

Financial experts caution that any substantial selling of US bonds by China could prove counterproductive. Such actions would likely strengthen the yuan artificially at a particularly vulnerable time for Chinese export competitiveness. The resulting market panic could severely diminish the value of China’s broader dollar-denominated assets, currently valued at $3 trillion.

John Higgins, chief markets economist at Capital Economics, notes that while concerns exist about China potentially offloading its treasury holdings, such action would result in significant self-inflicted damage through portfolio losses and reduced competitiveness against the US dollar.

The traditional safe-haven status of US bonds and the dollar appears to be weakening, with both assets experiencing price declines alongside US equities over the past month. This synchronised selling pattern suggests a shifting market perception of US treasuries as risk-free assets, marking a potentially significant change in global financial markets.