China trade dispute is essentially about

fairness. The U.S.

has long complained that they're not treated

fairly by the Chinese that it costs too much to

send American products into China.

And along with that the US does not charge enough

for Chinese products that come into the US.

Now this has been a topic of conversation for a

long time it's gone through multiple presidents,

through administrations, through many Congresses.

The thing is, nobody's ever really done very much

about it.

There have been a few measures here and

there, some tariffs on Chinese

products when they've tried to dump certain

products into the U.S.

but nothing as strenuous and nothing as concrete

and nothing as serious as what the Trump

administration has done with the tariffs

that it's leveled against Chinese goods.

Now of course the Chinese have countered with

their own tariffs but their retaliatory measures

are somewhat limited in scope.

So the Chinese basically have three ways that they

can retaliate against American tariffs.

One of course is that they can level their own

tariffs and they have done that.

Number two is that they can make it more

difficult for U.S.

companies to operate in China.

Of course the big one that comes to mind there is

Apple. It could really make Apple's life

miserable through a whole host of measures.

The third thing that they can do, and this is

what we call the nuclear option, is that they can

either stop buying U.S.

treasuries or they can actually start selling

U.S. Treasuries back into the market.

Now the reason why this is such an important

thing and why we call it the nuclear option is

because China is the largest holder in the world

of US debt.

It's got over a trillion dollars, close to $1.1

trillion dollars in U.S.

bonds, notes, bills, those those sort of things.

And the U.S.

counts on China to buy up its debt.

Of course that's very important with the U.S.

running nearly trillion dollar deficits which are

expected to continue as far as the eye can see.

So if China is not a big player in that market it

could make life very difficult for the U.S..

The idea of China going to the nuclear option is

something that's been framed in the local media

there, which of course is its state-run media,

where they've talked about scholars studying this

issue.

Now that's a very calculated type of language

where they say, 'OK we're just going to study

this. We're going to look at this.'

It's basically saber rattling, is what it really

comes down to.

They want the US to know that this is something

that's on the table.

Everybody knows that the chances of China doing

this aren't really good.

But as the dispute goes on and if the dispute

continues to go on, which it's likely to do, it

becomes more and more of a possibility where

China has to say look we can't match you dollar

for dollar tariff wise. That's

the big thing for them, because the U.S.

obviously imports far more goods from China than

the other way around.

So if this continues to go on, if the stakes get

higher, if feelings continue to get hurt, it

becomes more and more of a viable possibility for

China to step in and stop buying U.S.

Treasuries or sell them outright.

The big thing for China is that if it does take

this type of nuclear option it will not go

unscathed, if it does something like

that. Because, look, China needs to hold U.S.

Treasuries.

They're still the most liquid instrument in the

world as far as fixed income goes.

They have they carry a pretty decent yield on

them. It also would weaken the U.S.

dollar, which would make U.S.

multinationals stronger.

And it would just generally cause a crisis of

confidence within the world that China is

stepping away from this market.

So there is damage that could be done significant

damage to the Chinese economy if it would step

away from the market.

Now of course that doesn't mean they won't do it.

China is under a different political system than

the U.S.

President Trump and Congress, they have to answer

to the American people.

The way the Chinese government, the way their

political system is set up, President Xi does not

have to answer on the same level that President

Trump does. So they can go ahead and they can

sustain a little bit of

damage. Of course, China's economy is still a

very strongly growing economy.

So they have a little bit of wiggle room here,

but not a whole lot.