In the tariff war between China and the United States, will China use the 760 billion U.S. Treasury bonds as a weapon?

As the trade tariff rhetoric between China and the US becomes increasingly confrontational, China reiterated its "fight to the end" pledge last Friday, but paused further tariff increases on the US, calling the Trump administration's actions a "joke" not worth matching. Bloomberg Asian market columnist and former investment banker Shuli Ren believes that Trump's tariff reversal exposes his core weakness. Beijing could easily undermine the US's safe-haven status, pointing to China's $760 billion in US Treasury holdings.

China Holds $700 Billion in US Debt, Bessent Says No Need to Worry About Debt Volume

As the second-largest US debt holder, China currently holds $760.8 billion in US debt. Last week, the 10-year Treasury yield rose 50 basis points to 4.49%, marking the largest weekly increase since 2001. Some of the most intense fluctuations occurred during the Asian trading session, sparking speculation about Beijing's market involvement. Will China weaponize its assets and sell them off?

US Treasury Secretary Scott Bessent dismisses such concerns. In a recent interview with Tucker Carlson, he discussed the advantages of being the world's largest borrower.

"If you borrow from a bank, the bank is in a dominant position and can reclaim anything you've borrowed. But if your loan is large enough, you're somewhat above the bank."

Trump's Tariff Policy Reversal Exposes US Fatal Weakness

However, Trump's tariff reversal exposed a fatal weakness in the White House: after seeing US bonds plummet, Trump's staff held an emergency meeting and temporarily suspended additional tariffs on all countries except China.

(Pausing Trump's Tariffs for 90 Days: JPMorgan's Dimon and Hedge Fund Titan Ackman Emerge as Key Drivers)

After all, Bessent, who is now leading the tariff negotiations, needs a stable bond market for sales. His department needs to issue approximately $2 trillion in new debt this year, plus roll over about $8 trillion in maturing bonds. Each basis point increase in yield costs the government about $100 billion.

Under Anti-American Sentiment, US Dollar and Bonds Have Lost Safe-Haven Status

Shuli Ren believes Beijing doesn't even need to sell many US Treasury bonds to continue the bearish narrative. If Trump is determined to turn his country into an economic island through high tariff barriers, it's logical that foreign countries no longer need to hold so many US dollars.

The US dollar has lost part of its dominant position in international trade and finance. According to IMF data, the dollar's share in global reserves has dropped from over 70% twenty years ago to 58% last year. Apart from trade tensions, US Treasuries have not generated stable total returns in recent years due to the Federal Reserve's indecisive stance on interest rates.

Last week also reported that the People's Bank of China has increased gold reserves for the fifth consecutive month. This triggered frenzied buying, with more people betting that gold is more attractive than the US dollar. In fact, during this trade war, gold has played a more important hedging role and continues to reach new highs.

In other words, in this turbulent environment with rising anti-American and anti-bullying sentiment, the People's Bank of China doesn't need to expend much effort to break the safe-haven status of the US dollar and bonds. Global investors are eager to look elsewhere. For example, Canada's largest pension fund is now viewing Europe as an attractive alternative capital location.