China’s $1 Trillion Trade War Weapon: Did it ever use it?

Back in August 2019, during a peak in the U.S.-China trade war, analysts speculated whether China could use its massive holdings of U.S. Treasury bonds as a weapon.

At the time, Beijing held approximately $1.1 trillion in U.S. government debt, making it America’s largest foreign creditor.

The theory was that if China dumped a significant portion of its Treasuries, it could destabilize bond markets, send U.S. borrowing costs soaring, and rattle the global economy.

However, experts argued that such a move was unlikely due to the self-inflicted risks it could impose on China’s economy. A rapid sell-off would not only erode the value of China’s remaining holdings but also lead to yuan appreciation, potentially harming the competitiveness of Chinese exports.

Where Do Things Stand in 2025?

Since 2019, China has steadily reduced its U.S. Treasury holdings.

As of December 2024, China’s holdings stood at approximately $759 billion, down from $768.6 billion in November 2024, and significantly lower than the $1.1 trillion it held in 2019.

This decline reflects China’s ongoing efforts to diversify its foreign exchange reserves and reduce reliance on U.S. assets.

At the same time, China has been expanding the internationalization of the yuan, pushing for alternative financial infrastructures that reduce dependence on Western systems. For instance, Hong Kong is working on establishing an Asian clearinghouse to compete with Euroclear and Clearstream, further supporting the global use of the yuan.

So...

Despite fears in 2019, China never weaponized its U.S. Treasury holdings in a way that would destabilize financial markets. Instead, Beijing has gradually reduced its exposure while focusing on building alternative economic strategies, such as strengthening trade ties, boosting domestic financial markets, and promoting the yuan as an international currency.