In the shadow of a shifting global order, the economic dance between the U.S. and China has taken a sharp, strategic turn. What once was a symbiotic relationship built on trade and mutual growth is now unraveling into a high-stakes contest for control over the future’s most critical resources—both financial and material.
China’s Strategic Hoarding of Rare Earths
In April 2025, China escalated its economic statecraft by imposing sweeping export controls on key rare earth elements—materials essential for everything from fighter jets and electric vehicles to MRI machines and smartphones 1. These restrictions, targeting elements like dysprosium, terbium, and samarium, are not just about minerals—they’re about leverage.
China controls over 70% of global rare earth mining and 90% of processing1.
By tightening its grip, Beijing is signaling that it’s willing to weaponize its dominance in critical supply chains to counter U.S. tariffs and broader geopolitical pressure. This move echoes the broader ambitions of Made in China 2025, a state-led initiative aimed at dominating ten high-tech sectors, from robotics to biopharma.
China’s Divestment of U.S. Treasuries: A Strategic Signal
China is rapidly reducing its holdings of U.S. Treasury securities, a move that goes beyond financial rebalancing. Unlike Japan—whose recent sell-off is driven by domestic fiscal needs—China’s actions are strategic and geopolitical.
As of mid-2025, China’s U.S. Treasury holdings have fallen below $750 billion, down from a peak of over $1.3 trillion in 2013. This sharp decline reflects Beijing’s intent to reduce reliance on the U.S. dollar and shield itself from potential sanctions or asset freezes amid rising tensions, particularly over Taiwan.
Japan, meanwhile, has also significantly reduced its U.S. Treasury holdings—by approximately $220 billion between 2022 and early 2025, from $1.29 trillion to $1.07 trillion1. While Japan’s motivations are largely economic, including currency stabilization and trade tensions, China’s divestment is more strategic in nature.
This financial decoupling coincides with China’s rare earth export restrictions and the broader U.S. effort to “de-risk” from China. Together, these moves suggest a deliberate effort by China to distance itself from the Western-led financial system and prepare for a prolonged economic and geopolitical standoff.1
Why Is China Selling U.S. Bonds?
1. De-dollarization Strategy: China is actively promoting the internationalization of the yuan (RMB), including through bilateral trade agreements settled in local currencies and the expansion of the Cross-Border Interbank Payment System (CIPS) as an alternative to SWIFT.
2. Geopolitical Hedge: With rising tensions over Taiwan, semiconductors, and tech restrictions, Beijing is reducing its exposure to U.S. financial leverage.
3. Diversification: China is reallocating reserves into gold, euro-denominated assets, and Belt and Road-related investments in the Global South.
4. Market Signaling: The bond sell-off serves as a warning shot to Washington—a reminder that China holds significant leverage in global capital markets.
Implications for the U.S. and Global Markets
– Rising Yields: As China and other foreign holders reduce their Treasury purchases, demand weakens, pushing yields higher and increasing borrowing costs for the U.S. government.
– Dollar Volatility: Reduced foreign demand for Treasuries can undermine confidence in the dollar, especially if paired with broader de-dollarization efforts.
– Financial Fragmentation: The move accelerates the fragmentation of the global financial system into competing blocs—one anchored by the dollar, the other increasingly influenced by the yuan and alternative payment systems.
Deglobalization and the Rise of Economic Nationalism
We are witnessing a “recalibration of globalization”—a shift from efficiency-driven global supply chains to resilience-focused national strategies. Xi Jinping’s vision of national rejuvenation, underpinned by MIC2025, is not just about economic growth; it’s about sovereignty, security, and survival in a multipolar world.
The U.S. response has been equally assertive. Through mechanisms like CFIUS (Committee on Foreign Investment in the United States), Washington is blocking Chinese access to critical technologies and tightening scrutiny on foreign investments. This techno-economic rivalry is no longer just about trade—it’s about who controls the future.
Economic Snapshot: Mid-2025
Global GDP growth is projected at 2.5% for 2025, down from 2.7% in late 20241.
U.S. GDP is expected to grow at 2.15%, reflecting slower investment and trade2.
China’s GDP is forecasted to grow at 4.48%, maintaining momentum through domestic stimulus and industrial policy2.
Inflation remains elevated in many economies, with the U.S. averaging 3.2% and China at 2.1%.
Trade balances are shifting: the U.S. trade deficit has widened, while China’s surplus has narrowed slightly due to export controls and global demand softening.
Investment trends show a pivot toward “friendshoring” and reshoring, especially in semiconductors, EVs, and defense-critical sectors.
The Great Decoupling: U.S.–China Economic Showdown
From rare earth hoarding to US bond portfolio rebalancing, and from Made in China 2025 to declining global GDP forecasts—2025 is shaping up to be a pivotal year in the global economic order.
- China tightens control over critical mineral
- China & Japan reduce U.S. Treasury holdings
- Xi’s MIC2025 strategy accelerates tech self-reliance
- Global GDP forecasts revised downward across the board
What Comes Next?
The convergence of rare earth hoarding, US bond recalibration, and industrial policy nationalism signals a new era of strategic decoupling. The global economy is fragmenting into competing blocs, each vying for control over the materials, technologies, and capital that will define the 21st century.
For businesses, investors, and policymakers, the message is clear: the age of benign globalization is over. What lies ahead is a world where economic power is wielded as a weapon, and resilience—not efficiency—is the new currency of global influence.
Let’s talk: How should businesses and policymakers navigate this new economic reality?
Some Strategic Actions that US & EU Companies can take now to Counterbalance
1. Diversify Supply Chains for Critical Materials
Action: Reduce reliance on China for rare earths and other strategic inputs by sourcing from alternative countries (e.g., Australia, Canada, Vietnam, Indonesia) or investing in domestic extraction and processing.
- Why: Mitigates risk from export controls and geopolitical leverage.
2. Strengthen Financial Risk Management
- Action: Hedge against currency and interest rate volatility stemming from bond market disruptions and de-dollarization trends.
- Why: Protects balance sheets from macroeconomic shocks tied to sovereign bond sell-offs and dollar instability.
3. Invest in Strategic Resilience Technologies
- Action: Prioritize R&D and capital expenditure in areas like semiconductor independence, battery materials, and AI-Infused Supply Chain Risk Management (SCRM) Platform-as-a-Service | Software-as-a-Service infrastructure.
- Why: Aligns with national industrial policies and reduces exposure to foreign tech restrictions.
4. Engage in Policy Advocacy and Public-Private Partnerships
- Action: Collaborate with governments on industrial policy, trade strategy, and investment screening frameworks (e.g., CFIUS, EU FDI screening).
- Why: Ensures corporate interests are represented in the evolving regulatory landscape.
5. Adopt “Friendshoring” and Regionalization Strategies
- Action: Shift manufacturing and sourcing to politically aligned or economically stable countries (e.g., Mexico, Eastern Europe, ASEAN, Brazil, India).
- Why: Enhances operational continuity and reduces exposure to geopolitical flashpoints.
Grateful acknowledgment is extended to Karl L. Buschmann for the inspiration behind this article, and to Gerry Vos for his invaluable support of the research.
