With trade tensions between the US and China rising, there is growing speculation over whether China will sell its huge stockpile of US Treasury bonds to strike back. Often referred to by analysts as the “nuclear option,” such a move could create major disruptions in global financial markets — but also carry serious risks for China itself.

As of January 2025, China holds around $760 billion in US government debt, making it the second-largest foreign holder after Japan. Selling a large portion of this could drive down bond prices, push up US borrowing costs, and unsettle global markets.

Philipp Ivanov, Founder of Geopolitical Risks & Strategy Practice (GRASP), believes this would be China’s most extreme response and is unlikely for now. “It will do quite a significant damage to the United States, but the damage to China might be even bigger,” he said. “I think that’s going to be a last resort for China.”

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He added that the next escalation, if it comes, could also involve a sharp devaluation of the yuan. “Selling the US Treasury bonds and devaluing significantly the yuan will be sort of the next stage of this trade competition,” Ivanov said.

The People’s Bank of China has been gradually working toward its long-term strategy of diversifying its reserves, moving away from the US dollar, and reallocating into other G10 currencies. This is reflected in the sharp drop in its share of US government debt held by foreign investors–down to 8.9% from around 28% in 2011. Overall, foreign investors hold roughly 30% of total US debt.

Economist Jeffrey Sachs believes China is unlikely to sit idle with its large foreign exchange reserves and dollars. “Whether it will act abruptly in a reaction or whether it will gradually continue the direction of a sell off, I don’t know. But it will continue in the direction of disgorging itself of US denominated assets,” Sachs told CNBC-TV18.

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The trade conflict has deepened after the US raised tariffs on Chinese goods to over 100%, prompting China to retaliate with 33–34% tariffs on all US imports. But Ivanov said this has now gone beyond just trade.

“We are now in this mainly a political and geopolitical confrontation, rather than economic or trade confrontation,” Ivanov said.

Despite preparing for a potential trade war for years, China is still vulnerable, especially because its economy relies heavily on manufacturing and the very sector is now being targeted.

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For the entire interview, watch the accompanying video

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