We all know that the US owes $16 trillion and change to everyone else. Or at least their government does. We also know that China owns perhaps $1.1 trillion of this. So, if China got pissed they could just dump all of that and thereby cause problems for, punish, the US?
Well, no, that’s not really how it works with sovereigns and bonds’n’loans. It’s the sovereign who can tell the creditor to go away, not the other way around. But even without that it’s still not a viable action for China:
China cannot plausibly retaliate against Donald Trump by dumping US Treasuries. Any attempt to do so would backfire through multiple channels. To the extent that this action weakened the overvalued US dollar – unlikely – China would be doing the White House a big favour. The Federal Reserve could in any case respond to bond sales with a blast of quantitative easing. This would blanket the Treasury market and prevent yields from rising. Each spasm of Sino-US hostilities leads to a chorus of calls from Chinese nationalists for the State Administration of Foreign Exchange (SAFE) to pull the plug on its $1.12 trillion holding of US bonds. Such a move would supposedly deliver a financial shock and…
It’s simply not something that works. There are all sorts of things China can do, killing the US economy by selling off their Treasury holdings isn’t one of them.