China Wins As Trump Torches U.S. Treasuries In Real Time

Forbes

15-04-2025

getty
On a recent New York-Tokyo flight, I bumped into a former Bank of Japan official. A senior, battle-tested one who'd ostensibly seen it all. He was on the job amid the 1997 Asian financial crisis, Russia's default in 1998, the Lehman Brothers crash in 2008, the 'taper tantrum' of 2013, the Donald Trump 1.0 era and Covid-19.
Naturally, I asked him what he made of the Trump 2.0 trade war shaking up Asia. 'I keep thinking of the Far Side,' he quipped, referring to Gary Larson's anthropomorphic comic strip of old.
One in particular, he said, depicting airline pilots warning their 300 passengers of turbulence to come. In the next panel, we see that the pilots are swinging the yoke wildly back and forth, creating havoc for fun.
'We're all on that plane now, with Trump at the controls creating chaos for his amusement,' he said. 'But Asia sure isn't amused.'
Neither are bond investors, which only means more Trumpian turbulence everywhere. Self-inflicted, too, which is generating a sense of betrayal among Asian central banks that have long been the core of Washington's ability to live beyond its means.
Year after year, decade after decade, officials in Tokyo, Beijing, Seoul and beyond dutifully bought U.S. Treasury securities. That's now changing. Investors everywhere are questioning the idea that U.S. government debt is still special and immune to the laws of financial gravity.
Trump has, in short order, threatened the sanctity of U.S. government debt. That has governments from Japan to China to Germany wondering about the safety of vast amounts of public savings.
For years now, a succession of American governments took for granted Asian demand for Treasuries. Trump, though, is the first U.S. leader to try the patience of Asian central banks in direct terms. That itself raises questions about this White House's interest in global stability.
Aside from the policy volatility, underlying fundamentals raise their own questions. The U.S. national debt is approaching $37 trillion at a moment when Team Trump is angling for more tax cuts and neutering the Internal Revenue Service.
Trump's tariff policies, meanwhile, threaten to send inflation skyrocketing. This has Trump on something of a war footing with the Federal Reserve. Trump wants Fed Chairman Jerome Powell to cut rates. Powell argues inflation is too uncomfortably high to lower rates.
The schizophrenic policy shifts are really spooking investors, too. Trump's tariffs on China alone have gone from 10% to 145% in the space of a few weeks. Are they going even higher? Lower? It's anyone's guess.
If you're a CEO anywhere who was uncertain last month about hiring, hiking wages, making investments or taking a risk on a new product or strategy, you're now even less inclined now to do any of these things. And if you're an Asian central bank official worried about holding U.S. Treasuries, the impulse to buy more is dwindling by the minute.
But what of large-scale selling? Any whiff that Japan might trim its nearly $1.1 trillion of Treasuries could devastate global credit markets. The same with Beijing dumping large blocks of its $760 billion of U.S. government debt.
Last week, markets were awash in rumors that the Bank of Japan, People's Bank of China or one Asian monetary authority or another might be reducing exposure to Trump's policy chaos. Suffice to say, the most tantalizing financial data in coming weeks will be on central banks' reserve holdings.
It's not that simple, of course. News that officials in Japan, China, South Korea, Taiwan, India or elsewhere are selling dollars could send U.S. yields sharply higher. That could destabilize the global financial system in unprecedented ways. Aside from the carnage in markets, the shockwaves could have U.S. consumers closing their wallets.
It's possible that the losses Asian governments might suffer from Treasuries are preferable to a global crisis that makes 2008 seem tame by comparison. Indeed, Japanese officials say they're not planning on using U.S. debt as a tariff retaliation tool.
Yet if China went that route, BOJ officials would face some very uncomfortable decisions and trade-offs. Particularly with Prime Minister Shigeru Ishiba gearing up for bilateral trade talks with Team Trump.
These risks make Powell's job even harder, too. If he cuts interest rates to make Trump happy, inflation could shoot higher and damage trust in the dollar. Inflation risks are also intensifying thanks to Trump's tariffs.
The Fed losing control over inflation could greatly reduce demand for U.S. Treasuries. Trump's designs on changing the Fed's mandate to pressure Powell's board to cut rates could end up doing the same.
One doesn't need to indulge in conspiracy theories to worry that China might shun Treasuries. The more Washington's profligate fiscal policies collide with Trump's chaos, the more America's last AAA credit rating could be in trouble.
The silence from Moody's Investors Service, the last to assign the U.S. a top rating, is deafening. The same goes for S&P Global and Fitch Ratings, both of which rate the U.S. economy AA+.
Yet as Trump wreaks havoc with the U.S. markets, China gets to look like a pillar of strength, stability and, yes, capitalism. Just one more way Trump's self-defeating trade war is making China's ambitions of economic dominance great again.