The world’s second-largest economy is steadily unloading billions of dollars in US Treasuries.

New data from the US Treasury Department shows China pared its Treasury holdings from $816.3 billion in December of last year to $767.4 billion in March.

That’s a quarterly decrease of $48.90 billion.

The chief Asia foreign-exchange and rates strategist at Bloomberg Intelligence, Stephen Chiu, says a clear trend is underway.

“As China is selling both despite the fact that we are closer to a Fed rate-cut cycle, there should be a clear intention of diversifying away from US dollar holdings.”

The drop in China’s ownership of US bonds comes as former International Monetary Fund (IMF) deputy director Desmond Lachman warns that a fresh trade war between the two largest economies is brewing.

In a post on the Washington-based think tank American Enterprise Institute, Lachman says that both President Biden and former President Trump are drumming up “punitive import tariffs” against China.

“In addition to a 100% import tariff on Chinese electrical vehicles, Biden announced that the U.S. will triple import tariffs on Chinese steel and aluminum, and double import tariffs on Chinese semiconductors and solar cells.

Not to be outdone, former President Donald Trump is indicating that if he is elected again as president, he will increase tariffs on Chinese electrical vehicles to 200% and will impose a 10% tariff on all U.S. imports.”

According to Lachman, the increased import tariffs will likely prompt China to retaliate, leading to an escalation that would hurt both nations. Should a full-blown trade war materialize, Lachman warns that it will add inflationary pressure in the US as Chinese companies increase prices to cover the additional costs of entering the US market.

“The Federal Reserve is already finding inflation unexpectedly resistant to its interest-rate increases. A new trade war would only further delay the start of a Fed rate-cutting cycle, depriving the country of a boost to growth.”