China and the United States continue to be at odds with whether Beijing will take out this “weapon”

As the world’s two largest economies, China and the United States, trade tariffs, geopolitical tensions and human rights issues, investors are concerned that China may slow the pace of its purchases of U.S. bonds or sell its holdings of more than $1 trillion in U.S. debt. Analysts and investors say that despite trade and geopolitical tensions between the U.S. and China, China is unlikely to significantly cut the size of its U.S. bond purchases anytime soon as its foreign exchange reserves increase.

U.S. President Joe Biden last week compared Chinese Communist Party President Xi Jinping to Russian President Vladimir Putin, saying they are both supporters of authoritarian politics, according to a Reuters 2 report. But he said the U.S. does not seek confrontation with China over trade disagreements, changes to Hong Kong’s electoral system on Beijing’s part that have led to democratic rollbacks, the treatment of the Uighur minority and the expansion of military power. The concerns about U.S.-China relations come against a backdrop in which U.S. bond yields jumped to a one-year high in March, the U.S. government issued new debt to finance spending plans and the fiscal deficit surged to a record high with no sign of slowing.

But analysts say it will not be easy for China to sell U.S. debt without depressing prices and causing losses to itself.

According to Min Dai, an analyst at Morgan Stanley, in a recent report, China has increased its investment in U.S. bonds over the past few months as the yuan has appreciated and its foreign exchange reserves have increased. China’s holdings of U.S. public debt rose to $1.095 trillion in January, up from $1.054 trillion last October, but still below the peak of $1.32 trillion reached in 2013, according to the latest government data.

As the U.S. government increases its supply of public debt, the U.S. Federal Reserve’s (Fed/FED) position as the largest holder of U.S. debt becomes more secure and China’s holdings shrink as a share of total U.S. debt.

At year-end, U.S. outstanding debt surged to $21.65 trillion, compared with $17.19 trillion a year ago and $8.29 trillion in 2010.

Another issue that would make it difficult for China to reduce its U.S. bond purchases is that few other markets have the liquidity or low risk that U.S. debt has, according to the report. If China does sell U.S. debt, it will cause bond yields to climb, which will eventually prove to make U.S. debt more attractive and attract other investors to buy it. The Federal Reserve is also expected to step in if yields rise to the point where they could hurt U.S. economic growth.

Matt Gertken, a geopolitical strategist at BCA Research, was quoted by Reuters as saying that regardless of which of the above considerations, “this is not a weapon that China can easily use,” Gertken said, adding that “China only holds about 5 percent of U.S. bonds, so that they could have some impact, but it’s not big, that’s all.”