Mounting Pressure on China
While we in Berlin were allowed to witness the delirious wedding dance of the coalition of debt kings around Friedrich Merz, Washington offered the stage for a bizarre world theater. Theater mood held the stock exchanges in its grip, as panic turned into euphoria over the course of the day. A glance at a curious but pathbreaking day that put on display a dangerous escalation of the trade conflict between the U.S. and China.
U.S. Treasuries worth over $700 billion still rest in the reserves of the Chinese central bank, which it can use to defend its currency if the market demands it.
Scott Bessent set the tone for a memorable day with the hint of a possible delisting of Chinese stocks from the U.S. market. Everything lies on the table, said the American Treasury Secretary when asked whether it’s conceivable to block China’s market access to Wall Street. With that, it becomes clear: The markets have become the stage of geopolitical power games.
The escalating conflict of the two superpowers is cementing itself. What happened next was foreseeable: The exchanges collapsed, and even the U.S. Treasuries, firmly established as a safe haven and global collateral in the credit business, experienced a dramatic price drop. Yields shot up by about 300 basis points in the meantime — a worrisome jump at the otherwise low-volatility bond market and a sign of panic among hedge funds and other market players, whose core business is to monetize the usually low volatility of these papers through arbitrage deals at the spot and futures markets.
The Borders of Power
Politicians who step into the geopolitical arena inevitably clash with this market, the heart of the international credit business. And who exerted pressure on it, whether China or hedge funds, plays only a subordinate role. It limits political maneuvering room. Every excessive panic affects the liquidity of this market — the banking system threatens to freeze if trust in the stability of U.S. bonds erodes. And what weighs heavily from a political view: The ongoing refinancing of government debt mountains becomes a problem that, in the end, only the central bank can solve temporarily and at the cost of price stability. Here lies the systemic dilemma: The U.S. wants to find a way out of its twin deficit through a forced reordering of international trade, but as the issuer of the world reserve currency, it finds itself subject to the operational constraints of the credit market, which cannot absorb sudden volatility.
One Tweet Away from Boom or Bust
The uncertainty is omnipresent. One tweet suffices to trigger euphoria or collapse at the market. And it came: Trump — wholly the dealmaker — published a pithy sentence on Truth Social: It’s a good time to buy. DJT.
Open market manipulation? Three hours later came the next twist: Three months’ grace for the trading partners — all except China. For the Chinese, the White House had other plans in store: special controls of Chinese freighters in American ports, threatened tariff increases, and an open currency war if Peking doesn’t yield. There, they have no thought of submitting to American pressure and pegged tariffs on U.S. products initially at 104 percent.
After the dramatic crash, Trump pulled the emergency brake in the afternoon: Tariffs postponed. The panic at the bond market had not gone unnoticed — the people had become a little “yippy and queasy,” said Trump. Those are euphemisms for a scenario that reveals the borders of political maneuverability. Had they lost their nerve in Washington in view of the plunge at the bond market? After all, they’re counting on falling interest rates at the Treasury to roll the debt mountain through time as cheaply as possible. 9.2 trillion dollars come due this year — overshooting rates are the last thing one can afford amid the debt misery. Add to that an ongoing, barely restrained new debt pile-up. It seems as if government debts, beyond a certain point, develop a life of their own that even the dedicated team around Elon Musk cannot tame.
China Surplus: The Core of the Conflict
At the core of the conflict hovers the artificially created export surplus of China — about $400 billion, or one percent of global economic output — brought about through currency manipulation, export subsidies, and ethically questionable labor conditions. The trade deficit of the U.S. with China amounts to some $300 billion annually, while Washington permitted itself a budget deficit of $1.83 trillion last year — a path that must lead to fiscal catastrophe.
In Washington, they’re evidently of the opinion that China’s power over this market can be broken. The Chinese economic miracle, reeling in deflationary and demographic malaise, has visible cracks, and the cadres of the Communist Party are increasingly hard-pressed to explain when their elaborately celebrated five-year plans don’t deliver the prosperity with which they justify Peking’s power glut.
There, however, they command plenty of maneuvering mass. U.S. Treasuries worth over $700 billion still rest in the reserves of the Chinese central bank, which it can use to defend its currency if the market demands it. Beyond that, this reserve offers a credible threat scenario. China can force a yield chaos and volatility through drastic sell-offs that the Trump administration absolutely wants to avoid right now.
The World at the Crossroads
How does it go on now? The global order disintegrates into two camps. On one side: the resurgent superpower U.S., which — after the paralyzing Biden years — turns to market principles, civic freedoms, and the dismantling of rampant state bureaucracy. On the other side: China, the antagonist, which bets on state intervention, capital steering, and opinion control. Donald Trump opened a time window yesterday. Three months remain for the world to get clear on its own position in this sharpening system conflict. The hour of confession nears: Do societies set on freedom, competition, and self-responsibility — or do they drift off toward control, censorship, and collective disempowerment?
READ MORE from Thomas Kolbe:
The Euro’s Paper Empire: Germany’s Big Bond Gamble
US Tariffs: China in the Crosshairs
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