China starts dumping US Treasuries as trade war keeps escalating

China might have begun dumping US Treasuries after announcing 84% tariffs on American goods this week, triggering a fresh hit to global markets on Wednesday.

The decision escalates tensions with Washington as President Xi Jinping ramps up economic pressure in response to the renewed trade war led by Donald Trump’s administration.

Duncan Wrigley, chief China economist at Pantheon Macroeconomics, said, “Beijing saw the way things are going and thought this might well be the opportune moment to apply more critical pressure on the US.” Trump’s tariffs were labeled “economic bullying” by China’s foreign ministry. Now, Beijing is hitting back through debt markets.

China triggers economic shock by unloading US bonds

As of January, China held $761 billion in US Treasuries, making it the second-largest holder of American government debt, behind only Japan.

The number is official, but Robin Brooks, a senior fellow at the Brookings Institute, estimated that the actual total is closer to $1 trillion once hidden holdings through European custody accounts are included.

By offloading this debt, China directly pressures US borrowing costs. Selling Treasuries forces yields to rise, which drives up interest the US government must pay to fund itself. It’s a costly hit, one that risks destabilizing financial markets. If Beijing sells too aggressively, the value of the remaining debt it holds drops too, and that turns this into a boomerang.

Interestingly, Marcello Estevão, chief economist at the Institute for International Finance, warned the sale would be dangerous for Beijing too. “It would be self-defeating because it would very much hurt China,” he said.

That’s because China’s central government and state-owned banks are loaded with dollar assets—roughly $3 trillion, according to Mark Williams, chief Asia economist at Capital Economics. “That’s roughly the value of UK GDP,” Williams said. Trying to get rid of that much debt too fast would backfire hard.

Williams compared the tactic to “lobbing a hand grenade at someone sitting across from you in a room.” That’s how close the financial interdependence is. Trump would take the hit, but Xi would catch shrapnel too.

Selling Treasuries in bulk would also hammer the dollar. That means the rest of China’s massive dollar holdings would lose value instantly. It’s a lose-lose situation. And there’s nowhere useful to park the money either. Williams said if Beijing repatriates the dollars, the renminbi would surge in value. That would make Chinese exports more expensive and screw up China’s trade position.

Robin Brooks said the worst-case scenario would spark panic in the Treasury market. “If China announces they’re going to sell their treasury holdings, for sure, yields in the market would spike. It would be a huge shock,” Brooks said. But the US Federal Reserve wouldn’t sit still. Brooks said the Fed would immediately launch a large-scale quantitative easing program to force yields back down.

There’s precedent for that. In March 2020, emerging market central banks dumped Treasuries to defend their currencies, and US bond yields jumped from 0.5% to 1.2% in a week. The Fed bought $1.2 trillion in debt to calm things down. If China repeats that scale of dumping now, similar emergency action is expected.

But Fed intervention has costs too. If the central bank buys massive amounts of debt to counter China’s move and inflation rises—especially with Trump’s new tariffs in play—the Fed could end up booking major losses on its own balance sheet.

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