With China and the United States engaged in a full-on trade war, anxious investors are asking which side can press its financial advantage given Beijing's vast holdings of US Treasuries. In truth the situation is more of a fraught equilibrium both sides have an interest in maintaining.

Commentators in Chinese state media have for years argued their government should use the debt to pressure Washington, whereas this week US Treasury Secretary Scott Bessent said those holdings - estimated at $1.1 trillion by Brad Setser of the Council on Foreign Relations - provide no leverage whatsoever.

Investors who watched a searing sell-off last week drive the benchmark 10-year yield  as high as 4.59 percent aren't so sure. Clients are peppering money managers with questions about a long-feared doomsday scenario: China weaponises its holdings, dumping some or all of them to push up American interest rates, either to gain leverage in trade negotiations or punish US President Donald Trump for slapping triple-digit levies on Chinese goods.

These concerns have been heightened by a shift in recent years by Beijing to diversify foreign exchange reserves. Yet it needs a large pool of dollar debt on hand to sell if the yuan's exchange rate starts tumbling. Granted, the People's Bank of China has been wary of directly selling Treasuries to this end since 2015, when it burned through most of its reserves fighting runaway depreciation. But its alternative measures to manage its currency would pack little punch without the ultimate backing of the Treasuries holdings.

Even a limited paring down of these, delivered as a warning shot, would pose a serious danger. It would be difficult to arrange confidentially, and word of any sale would stoke fears of a total divestment and trigger a panic in global markets that would torch the value of China's remaining dollar-denominated holdings. That would drive up the yuan's relative value, delivering another blow to Chinese exporters.

Then there is the question of what China would do with the proceeds. Bessent has argued the Chinese central bank would have to buy the yuan, which would strengthen that currency - but it could simply hold the dollars accrued from Treasury sales instead. It could also opt to pile into other bond markets in Europe or Japan, though whether those governments would welcome purchases is another matter.

Yet, Bessent's broader point stands: weaponising Treasuries would be at best both dangerous and difficult for China. The gloves might one day come off if the People's Republic lets its currency float freely, but President Xi Jinping has expressed a strong desire to keep the yuan stable. For now, China's holdings of American debt will hamper more rapid financial decoupling - even if Beijing and Washington might prefer otherwise.

Investors sold off US Treasuries after President Donald Trump's April 2 announcement of tariffs on global trading partners. The benchmark 10-year yield was trading at 4.3 percent on April 16, still elevated from pre-levy levels.

China is the second largest holder of American government debt after Japan, with official data showing direct holdings of $784 billion at the end of February. Brad Setser, senior fellow at the Council on Foreign Relations, estimates total Treasury holdings by the People's Bank of China are closer to $1.1 trillion.