China’s Nuclear Trade War Option–How Xi Could Destroy The US Housing Market In 1 Fell Swoop

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China’s Nuclear Trade War Option–How Xi Could Destroy The US Housing Market In 1 Fell Swoop

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As the intensity of President Donald

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with China continues to ratchet up, analysts are beginning to fret about the possibility that China may exercise its version of a “nuclear option.” ******** President Xi Jinping has not indicated any willingness to back down, and that may be because he knows he has numerous cards left to play. According to

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, China holds over $1.2 trillion worth of America’s

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.

CNBC notes that loan servicer Ginnie Mae estimates that China’s MBS portfolio accounts for 15% of the outstanding mortgage balances in the U.S. The U.S. housing market would be utterly devastated if Xi decided to take the gloves off and flood the market with its MBS. It’s also worth mentioning that China holds a lot of US debt in treasury bonds. The combined weight of that economic power could devastate the American economy.

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Guy Cecala, executive chair of Inside Mortgage Finance, told CNBC, “If China wanted to hit us hard, they could unload Treasurys. Is that a threat? Sure, it is. They’re going to look at pushing levers and trying to put pressure. Targeting housing and mortgage rates is a powerful driver of something like that.”

Mortgage rates have been rising rapidly because of the recent Treasury bond sell-off, and $1.2 trillion worth of mortgage-backed securities flooding the market would be a devastating one-two punch for several reasons. First, it would almost immediately result in higher interest rates at a time when most Americans are already struggling with housing costs.

Second, China flooding the market with its MBSs could cause a chain reaction where other nations follow suit to avoid being stuck without a chair when the music stops. Canada and Japan also hold large mortgage-backed security portfolios. Under normal circumstances, it’s difficult to imagine either Japan or Canada taking such an extreme measure.

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, which provides access to a pool of short-term loans backed by residential real estate with just a $100 minimum.

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Japan and Canada have been steadfast American allies on foreign and economic policy for decades, but Trump has targeted both nations with punishing tariffs. Even though the tariffs on Canada and Japan are not as extreme as the ones on China, it’s not hard to imagine either nation drifting further towards China’s orbit. In other words, the current circumstances are anything but normal.

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The threat is keeping a lot of financial analysts up at night. Eric Hagen, a mortgage and specialty finance analyst at BTIG, told CNBC, “Most investors are concerned that mortgage spreads would widen in response to either China, Japan, or Canada coming in with a retaliatory objective. The concern, I think, is on folks’ radar screens, and being raised as a potential source of friction.”

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CNBC also pointed out that the Federal Reserve, which bought up large tranches of mortgage-backed securities during the pandemic, has been quietly selling them to solidify its balance sheet. Hagen told CNBC, “That is a source of potential pressure on top of this whole conversation.” Although China has been slowly unloading its mortgage-backed security portfolio, there has so far been no indication it’s planning to flood the market with them.

The effects of such a move would certainly hurt the ******** economy for several decades, but there is another dimension to this equation. China’s history dates back thousands of years, whereas the U.S. is not quite 250 years old. A multi-decade housing correction would be the equivalent of the blink of an eye in China’s history, but it would be nearly 10% of America’s. This is why everyone is hoping cooler heads will prevail.

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