China reminds Trump it holds the note on dollar debt

The moment that many a US Treasury secretary feared for decades may have arrived: when Washington’s top bankers turn against US government debt.

Case in point: America’s No 2 financier in Asia — China — is reportedly advising banks to cut their exposure to US government securities. Though officials in Beijing haven’t confirmed the advisory, few traders doubt the context behind it — or the timing.

“If China was to ditch their Treasuries in a large-scale selling program, this would cause US and global yields to spike and would cause major disruption to the global economy,” said Kathleen Brooks, research director at brokerage XTB.

“The bond market is taking the view that China won’t do this,” Brooks added, “and if they do reduce the size of their Treasury holdings, they will do this in a slow and gradual way. Hence why yields are mostly stable so far.”

UBS economist Paul Donovan noted that even if China isn’t threatening to dump official holdings of US dollars, “the idea that international investors may be less inclined to buy US Treasuries in the future (without dumping existing holdings) is getting attention in markets.”

In the first year of his second term in office, US President Donald Trump has busily worked to trash trust in the dollar.

He has pushed the national debt toward US$39 trillion, attacked the Federal Reserve, imposed heavy tariffs on friends and foes alike, and shaken up the globe with geopolitical adventurism run amok.

These policies and others have the dollar and US Treasury yields in yo-yo mode. Officials in Beijing—particularly at the People’s Bank of China— have concerns about the safety of the combined $938 billion in US Treasuries. They also have President Xi Jinping’s inner circle revising Wen Jiabao’s 2009 fears about the dollar.

Sixteen-plus years ago, then-Premier Wen implored Washington to protect its AAA status. “We have made a huge amount of loans to the United States,” Wen said. “Of course, we are concerned about the safety of our assets. To be honest, I am a little bit worried.”

Washington, Wen stressed, must “honor its words, stay a credible nation and ensure the safety ofChinese assets.” Two years later, the fears of Wen’s Communist Party were realized when S&P Global downgraded the US’s top-notch rating to AA+. It prompted state news agency Xinhua to scold the US over its “addiction to debt.”

Years later, in 2018, Cui Tiankai, then China’s ambassador to the US, hinted that Beijing might reduce Treasury holdings amid concerns about losses. “We are looking at all options,” he said.

That same year, Fan Gang, a top adviser to China’s central bank, talked publicly about diversifying away from the dollar. “We are a low-income country, but we are a high-wealth country,” Fan said. “We shouldmake better use of capital. Rather than investing in US government debt, it’s better to invest in some real assets.”

Fears of a run on dollar assets have preoccupied every US government since Premier Wen’s time, when China was the largest holder of US debt (today it’s Japan).

In 2009, then-US Secretary of StateHillaryClintonasked then-Australian Prime Minister Kevin Rudd: “How do you deal toughly with your banker?”

In February 2009, in her first trip toChinaas a top US cabinet official,Clintondownplayed discussions over human rights and played up Washington’s hopes of prodding China to buy more government debt.

The Trump 1.0 era that followed undermined global confidence in the dollar. Alongside a record US$1.8 trillion tax cut in 2017, the then-US President Trump’s disastrous handling of Covid-19 necessitated $7.4 trillion in additional government spending. Equally worrisome were Trump’s flirtations with defaulting on US debt to hurt China.

President Joe Biden, from 2021 to 2025, played his own role in ramping up US debt. Biden also faced accusations of wielding the dollar as a tool in efforts to sanction Russia over its Ukraine invasion.

As strategist John Mauldin at Millennium Wave Advisors noted, “the Biden administration made an error in weaponizing the US dollar and the global payment system. That will force non-US investors and nations to diversify their holdings outside of the traditional safe haven of the US.”

The Trump 2.0 era is causing even greater damage to the credibility of dollar-denominated assets.

“The US government debt is still growing strongly with no apparent plan to contain it,” said Eswar Prasad, an economist at the Brookings Institution.

“And the institutions that have underpinned the dollar’s dominance are being shredded before our eyes. All of this should be enough to bring down the dollar a few more pegs, if not demolish it altogether.”

Trump’s tariffs and designs on Greenland, Prasad warned, could be dollar negative going forward. There’s a “real sense that we were witnessing a moment of rupture,” he said. “One thing that was clear to Europeans was that they can no longer trust the US as a reliable ally on military security, economic security, or any other major matter.”

The dollar has traded with increasing volatility since then. It hardly helps that “Trump issued a military threat against aNATOally and threatened new tariffs on other US allies that are also big creditor countries to the US,” Brad Setser, an economist at the Council on Foreign Relations, told The New Yorker. “A capricious US president played the key role in triggering this—he set it off.”

Economist George Saravelos at Deutsche Bank said that “in an environment where the geoeconomic stability of the Western alliance is being disrupted existentially, it is not clear why Europeans would be as willing to play this part.”

At the same time, Trump has made no secret of his desire for a weaker dollar to boost US exports. That includes threats to fire Federal Reserve Chair Jerome Powell and other US central bank officials.

And padding the Fed with MAGA-fied policymakers like Stephen Miran, who served as the chair of the White House’s Council of Economic Advisers until September.

As Miran wrote in a 2024 article: “The root of the economic imbalances lies in persistent dollar overvaluation.”

Still, many think speculation of the dollar’s demise has been greatly exaggerated. As Innes McFee, CEO of Oxford Economics, told Fortunemagazine, “it’s a convenient story aligned to political narratives, but the reality is there’s no real evidence of capital outflows out of US assets.”

What there is evidence of, McFee added, “is that the rest of the world is hugely exposed to US assets and historically much more exposed than it’s ever been, partly because of the Magnificent Seven and the AI trade and all of that sort of stuff.”

Yet with bond markets navigating “a perfect storm,” said Gennadiy Goldberg, strategist at TD Securities, a big question is whether China might pull the plug on US Treasuries.

There are long-standing fears that Chinese leader Xi’s government might dump its dollar holdings as a retaliatory instrument.

It would be a Pyrrhic victory, of course. Any surge in borrowing costs would boomerang back China’s way as US households suddenly consume less.

Nor would it be in Beijing’s interest ifglobal investorsdecided the US budget deficit is a train wreck in slow motion. The potential contagion effects could make the 2008 Lehman Brothers crisis seem tame by comparison.

Even so, Xi’s Communist Party might calculate that the US had far more to lose in the event of a Global Financial Crisis 2.0. A US-led world meltdown, sparked by a collapse in confidence in US finances, would catch Washington decidedly off balance, amplifying the fallout.

“Amid financial market turbulence, the Chinese government’s outreach to private financial institutions may have been primarily a reminder of the need to hedge at a moment of heightened uncertainty,” said Jeremy Mark, economist at the Atlantic Council’s GeoEconomics Center.

It may also have been aimed at reinforcing policy guidance as Chinese exporters seek to invest the dollars they have amassed from the country’s massive exportsurge, resulting in a record $1.2 trillion trade surplus in 2025.

But, Mark added, “it’s also possible the leak was intended as a message to Washington—or, more precisely, to Treasury Secretary Scott Bessent—in the wake of his recent comments about China.

At a February 5 congressional hearing, Bessentspoke about “rumors of Chinese digital assets,” possibly backed by gold, that could be used to “build an alternative to American financial leadership.”

Then, in a February 8 appearance on Fox News, he appeared toblamethe current gold price volatility on China. “The gold move thing—things have gotten a little unruly in China,” he said.

Bessent’s decision to single out China may not have landed well in Beijing. But, Mark said, “wherever the dust settles in the near term, the longer-term trajectory seems clearer.

“China’s ambitions to reduce reliance on the dollar will continue, and the Chinese government will keep finding ways to make life a little more difficult for the United States—and the dollar—wherever it can,” Mark said.

Follow William Pesek on X at @WilliamPesek