China and Japan have switched places. What’s next?

Tensions and polarization that escalated globally with the Russia-Ukraine war recently turned into open conflict between India and Pakistan. Soon after, we witnessed Israel not only committing massacres in Gaza but also entering into war with Iran.

Although the India-Pakistan and Israel-Iran clashes have ceased for now, it would be premature to say they are truly over. There are no concrete agreements signaling resolution. As for the Russia-Ukraine war, it's simply faded into the background—there’s not even a ceasefire in place.

So, where is the next flashpoint?

Looking at the U.S. Treasury bond chart, we see that while Japan has maintained a consistent level of holdings over the past 15 years, the UK has doubled its stake. But more notably, China has steadily reduced its U.S. bond holdings.

What about in 2025?

The same trend continues this year. China now holds the least amount of U.S. debt it has in the past two decades, while the UK continues to increase its purchases. It’s almost like a swap—China stepping back while the UK steps in. This looks like a strategic positioning on China's part. Whatever it's preparing for, it’s clear that a preparation is underway.

For nearly a century, China has aligned itself with the West. But against whom?

China played no major role in World War I, though it did witness battles between Germany and Japan on its soil. In World War II, it stood with the West against Japan. Despite Japan's superior firepower, China resisted for eight years. This resistance prevented Japan from reallocating its full force to the Soviet front and the Pacific. The U.S. recognized China as the “Fourth Great Ally” (alongside the U.S., UK, and USSR). After the war, China became a permanent member of the UN Security Council and gained international legitimacy as one of the few Asian nations to directly fight Japan.

But history has flipped. China and Japan have traded places.

Japan is now a firm ally of the U.S. and the West. China, on the other hand, has clearly shifted direction. Its bond activity makes this real in numbers. Just as the U.S. and the Soviet Union became Cold War rivals despite being WWII allies, the same kind of rift seems to be forming now between the U.S. and China.

The new alliances are becoming clearer through Treasury bonds.

China is well aware it’s surrounded. But will it enter a hot war? In my view, something like the U.S.-Soviet Cold War is far more likely. A direct military clash between two powers of this scale would risk global catastrophe. Everyone would lose. No one wins.