A Chinese think tank has adopted a new strategy for deterring U.S.-imposed trade sanctions in response to China's yuan-dollar peg -- They're warning the U.S. that it will lose any trade war it begins.


Both sides would be hurt economically in a trade war, which is defined by successive trade and economic sanctions imposed by each side, but the China-based Development Research Centre (DRC) thinks that China's 'nuclear option', ie. its ability to sell its vast holdings of U.S. government debt, would be its trump card:

Telegraph:

Ding Yifan, a policy guru at the Development Research Centre, said China could respond by selling holdings of US debt, estimated at over $1.5 trillion (£963bn). This would trigger a rise in US interest rates. His comments at a forum in Beijing follow a string of remarks by Chinese officials questioning US credit-worthiness and the reliability of the dollar.

...
Mr Ding reflects thinking among some in the Poltiburo, who seem convinced that the US is in decline and that China's rise as an exporter of goods and capital give it the upper hand.

Still, Gabriel Stern at Lombard Street Research says the DRC is 'utterly wrong'. Historically, exporters generally lose trade wars and China is over-estimating the grip it has on the U.S. debt market:

He described the implicit threat to sell Treasuries as "empty bluster" because Beijing's purchase of these bonds is a side-effect of its yuan policy. "Bring it on: it will weaken the dollar, which is what the US wants. The interest rate effect can be countered by the Fed."

Indeed, just a few weeks back we noted how American investors' massive panic into bonds had likely disabled China's 'nuclear option' which Ding Yifan describes above .


So both nations would be hurt quite badly economically by any protracted trade war, but China is massively more vulnerable via its exports and its need for continued rapid growth just to keep its people happy.