China doesn’t seem to fear a trade war with the US. And it has plenty of means at its disposal to fight the war, including the scaling back of buying US Treasuries, or even worse, sell-off of US Treasuries. After all, it is the largest holder of US Treasuries, totaling $1.17 trillion as of January 2018.
But China will never use this weapon – because it has very good reasons to keep buying US Treasuries specifically, because of its trade surplus with America, according to a report by www.forbes.com/.
That surplus totaled $385 billion in 2016, according to the Office of the US Trade Representative.
This means that China has excess US dollars that end up in the hands of Chinese exporters. But as these exporters must pay their bills in local currency, they take the US dollars to the local banks and convert back to Yuan. Eventually, these dollars end up with Bank of China (BOC), which provides the yuan to the local banks.
In turn, BOC has two choices. One of them is to keep these dollars as reserves and earn nothing. The other choice is to use this money to buy US Treasuries and earn an interest, which can amount to billions of dollars.
But there’s another, bigger benefit, associated with the second choice. Converting yuan into dollars helps keep the yuan artificially low against the dollar, and Chinese exports to the US artificially high.