China has signalled it may be ready to unleash one of its most powerful economic weapons in the escalating trade dispute with the United States: its colossal $760 billion stash of US Treasury securities. As tariff tensions reignite following President Donald Trump’s latest salvo of trade levies aimed squarely at Beijing, speculation is mounting that China might retaliate in a far more disruptive manner.
On Friday, Beijing dismissed the latest round of tariffs as “a joke”, declaring that Washington’s posturing no longer warranted tit-for-tat measures. Instead, President Xi Jinping’s government vowed to “fight to the end,” stoking fears that financial markets, not customs ports, could become the next battleground.
For years, China has remained the second-largest foreign holder of US Treasuries, behind only Japan. These bonds have long been considered a bedrock of global financial stability. But that stability is now being tested. Last week alone, the yield on the 10-year US Treasury surged by 50 basis points to 4.49%—the sharpest weekly rise since 2001. Notably, some of the most volatile moves occurred during Asian trading hours, fuelling speculation that China may already be trimming its holdings.
While US Treasury Secretary Scott Bessent attempted to play down such fears in a recent interview, claiming the size of America’s borrowing gave it the upper hand, the market disagrees. “If you owe the bank a little, they own you. But if you owe the bank a lot, you own them,” Bessent quipped. Yet in the context of global markets, this bravado rings hollow.
The US faces a Herculean fiscal challenge. With around $2 trillion in new debt to issue this year and nearly $8 trillion in maturing bonds to roll over, any upward pressure on yields could send borrowing costs spiralling. Analysts estimate that for every 1 basis point rise in yields, the government incurs an additional $1 billion in annual interest payments—an unsustainable trajectory if market confidence wavers.
Enter China. It need not offload its entire portfolio to cause disruption. Merely signalling its willingness to diversify away from US assets could spook markets. After all, the greenback’s share of global reserves has already dropped to 58% from over 70% two decades ago, according to the IMF. With the US increasingly perceived as economically insular and politically erratic, investors are seeking alternatives.
Gold is one of them. The People’s Bank of China has increased its gold reserves for a fifth consecutive month, a trend interpreted as a hedge against dollar depreciation and a possible harbinger of future divestment from Treasuries. The move prompted a surge in global gold prices and suggests that Beijing is preparing for more financial autonomy and strategic flexibility.
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There’s also a geopolitical shift underfoot. Several of Canada’s largest pension funds have begun pivoting investment towards Europe, seeking safer terrain amid Washington’s erratic policymaking. Should this trend gain traction, the broader appeal of US Treasuries could wane even further.
Some figures in the investment community have tried to spin the White House’s latest actions as clever manoeuvring. Hedge fund billionaire Bill Ackman described the partial tariff climbdown—pausing hikes on all countries except China—as “brilliantly executed” and “textbook art of the deal.” But many see it as an admission of vulnerability. Trump’s tariffs have backfired, triggering market turmoil and exposing America’s dependence on stable foreign financing.
And that’s precisely where China has leverage.
The message from Beijing is unmistakable: it won’t play the old game of tit-for-tat. Instead, it’s eyeing America’s fiscal Achilles’ heel. Weaponising its Treasury holdings may come at a cost to China, but the signal it sends—both to Washington and the wider world—would be thunderous.
As trade tensions deepen, global investors are watching closely. The next time markets jolt awake in the early hours of the Asian trading day, they’ll be asking one question: is China quietly pulling the trigger on its $760 billion weapon?
