Hedge fund titan Dalio tells CNBC that China might well use its massive US Treasury holdings to gain a strategic advantage over the United States in the ongoing trade war

Ray Dalio has proposed that China may use the nuclear option.

He is speaking to China’s ability to dump its holdings of US Treasury bonds. Doing so could fuel a massive rise in US interest rates that could potentially derail the US economy.

According to one view, such a move would harm China too. “The Chinese current account deficit is now under 1% of GDP,” said Richard McGregor, senior fellow at think tank Lowy Institute, last month. “If China were to do anything to the US dollar, that would obviously hurt Chinese holdings of the US dollar.”

Ray Dalio thinks otherwise

In contrast, Dalio would have us remember that the US and China have a data-creditor relationship beyond their trade relationship. “And that can be a dangerous thing,” he says.

Accordingly, Dalia said he wouldn’t rule out the nuclear option in the event the trade war worsened and the two largest economies in the world decided to subject each other to “maximum harm.”

Until June 2019, China ranked as the top creditor of the US, based on its Treasury holdings of $ 1.11 trillion. Post-June, that honor belonged to Japan.

Dalio is the founder of Bridgewater Associates, the world’s largest hedge fund.

The hedge fund manager is a regular on CNBC. He recently appeared to tell investors that they should take both sides of the Sino-U.S. trade war.