- "Weaponizing" U.S. Treasury holdings has always been a "non-starter" for Beijing, says Richard McGregor, senior fellow at the Lowy Institute.
- How Chinese private companies navigate the trade dispute may have a greater implication on how the Chinese economy will perform, he says.
- The deteriorating personal relationship between President Donald Trump and President Xi Jinping may also further damage the two nations' trade relationship, according to McGregor.
China has other "weapons" in its trade battle with the United States — and selling off its U.S. Treasury holdings will not be one of them, said Richard McGregor, senior fellow at think tank Lowy Institute.
As trade tensions between the two countries escalated in March, Beijing cut down its U.S. debt holdings at the fastest pace in about two years.
The move fueled concerns that China, the largest foreign owner of U.S. Treasurys, could employ the so-called "nuclear option" — the ability to sell off its Treasury bonds and trigger a surge in interest rates that would damage the American economy.
"Weaponizing" U.S. Treasury holdings has always been a "non-starter" for Beijing, said McGregor.
"The Chinese current account deficit is now under 1% of GDP," he explained. "If China were to do anything to the U.S. dollar, that would obviously hurt Chinese holdings of the U.S. dollar. And I also don't think they want to see the disruptive affect that will have."
McGregor said China has other options in the trade battle.
"China can manage its economy, manage its entry to its economy," he said.
Beijing can manage foreign access to the Chinese economy, and decide whether to boost the presence of foreign firms or deny them further access.
More importantly, he said, people should be watching how Chinese private companies navigate their way through this difficult time, because the implications of their success will have a major impact on the Chinese economy.
"They're the big exporters, not state companies," said McGregor, author of "Xi Jinping: The Backlash."
"I think what we need to watch is how they sort of manage or limit the damage — that is if the trade war goes on, and particularly if we get another round of tariffs."
Some of China's largest companies by market capitalization are along the eastern coast of the country: notably tech conglomerate Tencent in Shenzhen, tech behemoth Alibaba in Hangzhou, and various commercial banks in the Shanghai region.
McGregor said how some of those companies ride out the current crisis could offer clues to the health of the world's second largest economy.
"What happens to the private companies along the coast there, which are the sort of the real driving force of the Chinese economy, they could be really hurt," he said.
McGregor noted that the personal relationship between President Donald Trump and his Chinese counterpart Xi Jinping may be taking a turn for the worse — that could hurt the already tense relationship between the world's two largest economies.
The U.S. president pointed fingers at China when trade talks stalled and said Beijing did not hold up its end of the bargain. This week, he also threatened to slap more tariffs on another $325 billion of Chinese goods.
"He's a good friend," Trump said on Monday, referring to Xi. But he added: "I used to say he's good friend of mine; we're probably not quite as close now."
"But I have to be for our country. He's for China and I'm for the USA, and that's the way it's got to be. And this should have never been allowed to happen," the president said.
McGregor said the two leaders shared "quite a valuable relationship," and added that it was important for them to be able to talk and agree to temporary solutions, even as the officials under them were "at war."
But now, he said, "if the personal relationship, the personal rapport deteriorates as well, that just adds another weight dragging down the relationship."
— CNBC's Jeff Cox contributed to this report.