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[US Treasuries serve like their dollar-based checking and savings accounts. They hold them largely because they have to, not to keep a sort of hostage.]

The principal reason they do it is to hold down the value of the yuan. We are China’s single biggest export market. They are competing against foreign direct investment destinations all over the world. Apple and other Fortune 500 companies don’t have to assemble their products in China. And those products probably make up half or more of the trade deficit with China. They can put them together in the Philippines, Indonesia, Thailand and so on, all of which now have lower costs than China, because land and labor costs are lower.

Inertia, and the size of the Chinese market (#2 or #3 in the world for many products) combined with high Chinese tariffs on imports is why they continue to have plants there. Once US tariffs hit 25%, they will probably build plants elsewhere just for the US market. And over time, they will move all of their production not intended for the Chinese market outside of China, because neighboring countries (with the exception of Malaysia, Taiwan, South Korea, Japan and Singapore) and most of Latin America now have lower land and labor costs than China.

Since only 20% of Apple’s sales, but 100% of its production is currently in China, any move by Apple to establish plants outside of China will drop Foxconn’s Apple-related headcount in China by ~80%. That’s a big hit, given that a good chunk of Foxconn’s 1m Chinese employees work on Apple production. Multiply that hundreds of other Fortune 500 US companies, and China is looking at an exodus of millions of export-related jobs. Given that export-related jobs have far better pay packages than purely Chinese domestic industries, the Chinese economy would likely take a serious hit.

A lot of European companies are in the same position. They are 100% in China because of inertia, even though Chinese costs have increased in leaps and bounds over the past 3 decades. In total, dollar-wise, their production volumes in China are probably similar to the US. They, too, will move US-bound production outside of China, and probably production not intended for the Chinese market entirely out of China. So the Chinese are facing a double-whammy.

And I haven’t even included everyone else that also manufactures in China, including Chinese export companies, whose owners have the added incentive of getting their capital out of the clutches of the Party. With 25% tariffs, they now have a genuine excuse to bypass the current Chinese government restrictions on transferring money outside of China that no party honcho can ignore, along the lines of “Let me move my plant to the Philippines, or I will shut my doors, because my net profit is 5%. I can’t eat a 25% tariff. People who make stuff outside of China will eat my lunch on contract bids”.

https://www.latinpost.com/articles/136802/20170228/report-chinese-wages-now-higher-brazil-argentina-mexico.htm
https://en.wikipedia.org/wiki/Foxconn