The U.S. Borrowing Crisis and the Economic War with China

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While trade headlines have quieted, the economic battle between the United States and China is intensifying behind the scenes. At the center of this quiet storm is America’s growing reliance on debt—and the cracks forming in its bond market.

Trump’s Strategy: Tariffs and Tax Cuts

Former President Donald Trump’s strategy to bring manufacturing back to the U.S. relied on two major levers: tariffs and corporate tax cuts. The goal was simple—make it more expensive to produce abroad, and more profitable to build at home.

In 2017, Trump slashed the corporate tax rate from 35% to 21%. Now, a new proposal aims to cut it further to 15%, reinforcing the push to reshore American industry. Businesses are naturally drawn to lower taxes, but the broader question remains: can the U.S. actually afford this?

A $9 Trillion Problem

The cost of the proposed tax cuts is staggering. Over the next decade, they would add over $9 trillion to the national deficit—nearly $900 billion per year starting in 2025. To finance this, the U.S. will have to issue a massive amount of new Treasury bonds.

That’s where the real crisis begins.

A Bond Market on Edge

The White House expected that market volatility might drive investors into U.S. bonds, lowering yields and making borrowing cheaper. Instead, the opposite occurred.

In recent weeks, yields on the 10-year and 30-year Treasury bonds spiked, signaling a large-scale sell-off. Key foreign investors, including Japan, one of the largest holders of U.S. debt, began offloading their bonds. This suggests a loss of confidence in America's fiscal direction.

A particularly telling moment came during a recent 5-year bond auction. The yield hit nearly 4%, but demand—especially from foreign buyers—was underwhelming. The six-month average for international participation was about 70%. This time, it was just 64%.

Running Out of Room to Borrow

There’s a limit to how much the U.S. can continue borrowing without destabilizing the bond market. And that’s a serious problem when waging an economic war that requires significant financial firepower.

While U.S. retail investors have stepped in to buy more bonds, foreign demand is softening. That means higher yields, more expensive borrowing, and rising debt-servicing costs at a time when the U.S. can least afford it.

Meanwhile, in China…

Ironically, the tariff war made Chinese bonds more attractive. Since the conflict began, global investors have been pouring into Chinese debt markets. As demand rose, yields on China's 10-year bonds fell below 1.7%, allowing Beijing to borrow more cheaply than Washington.

This shift has given China a significant strategic advantage. It can subsidize key industries and fund long-term economic plans at a fraction of the cost facing the U.S. Treasury.

Bessent’s New Tactic: Cutting China Off from Global Credit

Recognizing the financial disadvantage, Trump adviser Scott Bessent is now targeting China’s access to international lending. The U.S. is urging multilateral development banks to stop treating China as a developing country, which has allowed it to access cheap loans.

The U.S. now wants these institutions to enforce strict graduation criteria—essentially cutting off Beijing from concessional financing.

A New Front in the Economic War

This economic war is no longer just about tariffs or supply chains. It’s about global capital flows and who can access the cheapest financing. As the U.S. struggles with rising debt and weakening bond demand, China is quietly becoming a more attractive destination for investors.

The battlefield is shifting—from trade deals and sanctions to auctions and interest rates. And for now, the bond market is sounding a clear warning: the U.S. can’t afford to keep escalating this war without risking a full-blown borrowing crisis.

U.S. Pushes ADB to Cut Off China’s Access to Loans

In a significant geopolitical move, U.S. economic advisor Scott Bessent recently met with Masato Kanda, the president of the Asian Development Bank (ADB), to discuss an urgent objective: ending China’s access to ADB financing.

Targeting Beijing’s Financial Lifelines

At the core of these discussions was a clear U.S. demand—gradually phase China out of ADB lending. While this shift has long been expected, it's now becoming policy, and it sets the stage for possible retaliation from Beijing.

The ADB, a multilateral institution designed to support economic development across the Asia-Pacific, operates like a regional development bank where countries, not individuals, borrow funds. These loans are often used to finance infrastructure, government-backed projects, or stabilize economies during crises. And while borrowers pay interest, the rates are generally favorable—especially for developing nations.

The U.S. and Japan are the ADB’s largest shareholders, each holding a 15.6% voting stake, giving them outsized influence. China, by contrast, holds just 6.4%. With U.S.-China tensions escalating, Bessent is working closely with Japanese officials to block China’s ability to use the ADB as a cheap credit source.

Why This Matters: China’s Borrowing Advantage

Although the ADB isn’t a charitable institution—countries repay their loans with interest—it still offers access to cheaper borrowing rates. As of now, if China were to borrow 10-year funds from the ADB, the interest rate would come in around 4.4%, nearly matching the U.S. 10-year Treasury yield of 4.24%.

This puts Washington in a tight spot: while the U.S. is fighting to fund its own deficit at rising rates, China is securing funding from multilateral banks at similar or even lower costs. That undercuts the U.S. strategy of raising China’s borrowing costs globally.

China’s Strategic Use of the ADB

From Beijing’s point of view, ADB loans offer multiple benefits:

1. Diversified Capital Sources: China can choose between issuing sovereign bonds or borrowing from institutions like the ADB. Whichever option offers the lowest rate wins—it’s financial arbitrage at the national level.

2. Spread Trade for Global Projects: China often uses low-cost loans to fund Belt and Road Initiative (BRI) projects in higher-risk countries. Borrowing at 4% and lending at 6% or more becomes a lucrative strategy.

3. Reserve Preservation: Even with large dollar reserves, China prefers to keep them intact. By borrowing externally, it retains flexibility to use reserves for currency stabilization if needed.

Why the U.S. Is Furious

Here’s the twist that has Washington irate: Western-developed nations, including the U.S., are effectively subsidizing China’s growth. Over 27 non-borrowing countries—including the U.S., Germany, France, and Canada—make up 67% of the ADB's capital base. These countries contribute funds, but don’t take loans. China, meanwhile, contributes and borrows—maximizing its “membership” benefits.

In effect, Beijing is tapping into the combined savings of the West to finance its development strategy, while competing with Western economies across technology, infrastructure, and industry.

U.S. Borrowing in Crisis Mode

At the same time, the U.S. finds itself trapped in a volatile debt spiral. Treasury yields spiked recently, with the 10-year surpassing 4.5% and the 30-year briefly breaching 5%. That reflects deep instability in U.S. debt markets—the only avenue left for Washington to fund its growing deficit.

This financial squeeze is being driven by a perfect storm: a costly trade war, rising interest rates, and political uncertainty surrounding a potential Trump return. All of these put additional upward pressure on U.S. borrowing costs, while China—despite borrowing in dollars—manages to secure cheaper loans through clever use of institutions like the ADB.

A Financial Chess Match

By pressuring the ADB to cut off loans to China, the U.S. is taking its economic war to the institutional level. This isn’t about tariffs anymore—it’s about limiting Beijing’s access to global capital.

Whether this strategy succeeds or backfires depends on how China retaliates and how the rest of the ADB’s shareholders respond. But one thing is clear: the financial battleground between the U.S. and China is only getting more complex—and more costly.

Why This Strategy Still Won’t Work

In April, China issued nearly half of all dollar- and euro-denominated bonds from emerging markets—a staggering share that reveals a growing shift in global capital flows. But what’s more important than the volume is the cost of borrowing. Despite rising geopolitical tensions, China is actually borrowing money at cheaper rates than the U.S. Treasury.

Specifically, Chinese dollar bonds were issued at yields 26 basis points lower than comparable U.S. government debt. To put it in perspective: if Washington borrows at 5%, Beijing is tapping the same capital markets at just 4.74%.

This is a remarkable signal—global investors trust China’s ability to repay more than they trust the U.S., at least in this particular bond segment. That creates a serious dilemma for U.S. capital markets. If China continues ramping up issuance of dollar-denominated bonds, it could begin competing head-to-head with U.S. debt for global liquidity, potentially forcing Treasury yields even higher.

Now, this might seem counterintuitive. Why would investors buy Chinese-issued dollar bonds when they could simply buy U.S. Treasuries and lock in a higher return? The answer lies in three strategic reasons:

1. Diversification Away from Washington: For many emerging economies—especially BRICS members—Chinese bonds offer a way to stay in the U.S. dollar system without being overly exposed to U.S. political risk, sanctions, or potential asset seizures. Buying Chinese dollar bonds is a hedge.

2. Capital Gains Potential: As demand rises for Chinese debt, prices go up and yields fall—creating room for capital appreciation. It’s not just about the interest rate; it’s about the price movement in response to global demand. The more the U.S. antagonizes global partners, the more demand flows toward alternatives like Chinese bonds.

3. Geopolitical Alignment: For countries looking to align more closely with Beijing, buying Chinese dollar bonds is a way to fund China’s rise while still meeting their own liquidity and reserve requirements. It’s like backing your ally, not your adversary.

In short, China’s dollar bonds let global investors play in the U.S.-dominated system without empowering the U.S. government itself. That’s a powerful value proposition—and one reason demand remains strong, helping push yields down further.

Even Scott Bessent, who’s spearheading U.S. financial efforts against Beijing, seems to recognize the challenge. Ironically, he ends many of his speeches with what sounds more like a marketing pitch than policy:

“Everyone should care about financial literacy. Whether you’re a student, just starting your career, or nearing retirement—understanding markets and making smart financial decisions leads to long-term economic security. And it’s fun too.”

But sentiment alone won’t fix structural problems. Will cutting off China’s access to development bank loans make any difference when global capital markets are still happy to lend? The numbers suggest otherwise.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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