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President Xi Jinping is on the offensive. China’s surprise announcement of 34pc retaliatory tariffs on US goods triggered a fresh wave of stock market falls on Monday.
“Beijing saw the way things are going and thought this might well be the opportune moment to apply more critical pressure on the US,” says Duncan Wrigley, chief China economist at Pantheon Macroeconomics.
The US-China stand-off triggered a 13.2pc fall in the Hong Kong’s Hang Seng index on Monday, the largest one-day move since 1997, and China’s CSI300 blue-chip index also fell 7pc.
China’s foreign ministry has labelled Donald Trump’s tariffs “economic bullying” – but the big question now is how much more is to come from Beijing?
In theory, Xi is sitting on a potentially nuclear option as he turns the screws on Trump.
China is the second-largest holder of US debt, known as treasuries, in the world. If it opted to dump this government debt, the blow to the US would be seismic.
According to the US Treasury, in January, China held $761bn (£592bn) in American government bonds. This was second only to Japan (which holds more than $1 trillion) and nearly a tenth of all foreign-held US government debt.
Robin Brooks, senior fellow at the Brookings Institute, says the real figure is even higher – likely around $1 trillion – after accounting for the unknown sums that China holds via custody accounts in Europe.
If China embarked on a mass sale of its US treasuries, the value of the debt would plunge and yields would soar. This would drive up US government borrowing costs and hammer the public finances in a highly destabilising move.
But the scenario is highly unlikely, not least because the pain for China would be huge.
Marcello Estevão, chief economist at the Institute for International Finance (IIF), says: “It would be self-defeating because it would very much hurt China.”
Mark Williams, chief Asia economist at Capital Economics, says: “China dumping treasuries would be the equivalent of lobbing a hand grenade at someone sitting across from you in a room.”
Trump would get hit, but Xi would be burned too.
Economic self-harm
The Chinese state and its banks own around $3 trillion in dollar assets. “That’s roughly the value of UK GDP,” says Williams. “There is no way to offload $3 trillion of assets in a hurry.”
If China started selling, it would trigger a plunge in dollar values, immediately hammering the value of all of its remaining dollar holdings. And China would not have many options for what it could do with the proceeds of what it did sell, says Williams.
“If it brings them back to China, the renminbi appreciates,” says Williams. This would make China’s exports far more expensive for the rest of the world, hitting its ability to export.