Will China use its US$1.2 trillion of US debt as firepower to fight the trade war?
- Fears are mounting among investors and analysts of potential adverse effects on global economic growth as China promises to strike back after US raised tariffs
- Uncertainties on how escalating tensions will unravel have hurt markets this week
China’s promise to strike back after US President Donald Trump increased tariffs on US$200 billion worth of Chinese goods on Friday has heightened uncertainty on how escalating trade tensions between the two countries will unravel and raised fears among investors and analysts of worst-case scenarios that will hurt global growth.
If China is unwilling to play ball on Trump’s terms, Beijing, analysts said, not only could retaliate by imposing countervailing tariffs of its own, but also has a range of financial firepower at its disposal to punish the US.
For starters, China could strike back by dumping its vast holdings of US government debt. Flooding the market with Treasuries would push down US bond prices and cause the yields to spike.
That would make it more costly for US companies and consumers to borrow, in turn depressing America’s economic growth.
Cliff Tan, East Asian head of global markets research at MUFG Bank, said it was unlikely that China would choose to scale back its holdings in US Treasuries sharply as that would hurt its own interests and fuel “extreme” market volatility.