Can China weaponize its Treasury holdings?
The question keeps coming up as to whether China could use its considerable holdings of US Treasury securities as a weapon in its tensions with the US.
Commerzbank Economic Research
06/20/2025
US Treasuries held by China as a "weapon"?
Economic and political tensions between the US and China have escalated significantly over the past decade. So far, both sides have been imposing tariffs on imports from the other country, restricting exports of certain goods (e.g. Rare Earths from China to the US or high-end semiconductors by American companies to China), and blacklisting companies from the other country. However, many observers fear that China could exploit its position as one of the US's largest international creditors and use its holdings of US Treasury securities as a weapon.
If China were to dump its holdings on the market, yields on US bonds would rise significantly. As a result, the US government would have to pay more to finance its deficits, and borrowing costs for businesses and households could rise significantly, which in turn would slow down the US economy considerably. In an extreme case, the resulting turmoil could shake the US financial system and trigger a global sell-off. So, it is being thought that Beijing could possibly use the sell-off of Treasuries as a threat and leverage in negotiations with the US.
China has reduced its holdings of US bonds, ...
However, the size of this potential "weapon" is uncertain. According to data from the US Treasury, China has reduced its holdings of US Treasury securities. China still held $765 billion in US Treauries in March, which is still considerable but significantly less than the peak of $1.3 trillion in 2013.This would make China the third-largest foreign holder of US government bonds behind Japan and the United Kingdom.
China has also recently reduced its holdings of bonds issued by the large US government-sponsored mortgage refinance companies (known as agencies). In March, China's agency bond holdings worth around $200 billion. Compared with its portfolio of US government bonds, China's agency holdings remained relatively stable for many years. Only in the past 12 months have they fallen quite sharply, by $50 billion.
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