Weaponizing Treasury Bonds: Options for Chinese Self-Destruction

Recent news mention the possibility of China negotiation leverage in tariff talks due to holding U.S. government debt. While it is true that China, the world's second-biggest economy also is the world's largest holder of U.S. Treasury bonds, the move for Beijing to dump its vast Treasury holdings to punish the U.S would be irrational. News talk about it China reducing its exposure to US Treasuries over the past six months and some have viewed the tactic as a “last resort”. Yet, especially as a last resort, this tactic would be ludicrous.

China requires Treasurys for its own internal financial stability. Tanking the prices with a mass sell-off would also depress the value of any securities China continues to hold. It could also damage the value of China’s other extensive dollar-denominated holdings, such as corporate bonds and stocks. Another concern would be that China’s goal to allow the yuan to trade lower against the dollar, and selling Treasurys would reverse that, making Chinese goods more expensive on the global market. Additionally, such moves would send ripples through the world economy, unleashing volatility that China’s own central bank could be unable to contain.

Selling dollar assets and repatriating yuan would add to China’s trade problems and “help address U.S. trade problems” by hurting the value of the dollar and making U.S. exports cheaper, said Brad Setser, an economist at the Council on Foreign Relations.

Keith Knutsson of Integrale Advisors commented, “especially as a last resort, weaponizing treasury bonds seem absurd – if the Chinese economy was ever in such unstable condition, mass-selling treasury bonds would practically guarantee massive economic damage to itself.”