Goldman Warns of $2.5 Trillion Sell-Off in Extreme U.S.-China Capital Market Decoupling Scenario

Goldman Sachs has issued a stark warning: if the U.S. and China fully decouple their capital markets, the global financial system could face a $2.5 trillion sell-off, driven by forced divestment of equities and debt. The analysis, led by analysts Kinger Lau and Timothy Moe, paints a dire picture of regulatory escalation, with Treasury Secretary Scott Bessent signaling that delisting Chinese firms from U.S. exchanges remains an “option on the table.”

The Anatomy of the $2.5 Trillion Risk

The sell-off estimate is rooted in two mutually reinforcing trends:
1. U.S. investors dumping Chinese assets: If regulators bar holdings of Chinese stocks listed in the U.S., investors would offload nearly $800 billion in equities, including ADRs of tech giants like Alibaba, PDD, and NetEase. As of March 2025, 300 Chinese companies listed on U.S. exchanges held a combined $1.1 trillion in market cap.
2. China liquidating U.S. assets: Beijing could sell its $1.3 trillion stake in U.S. Treasuries and an additional $370 billion in U.S. equities, responding to reciprocal sanctions and capital controls.

The Geopolitical Tinderbox

The scenario isn’t theoretical. The Trump administration’s 145% tariffs on Chinese exports and Beijing’s retaliatory 125% levies on U.S. imports have already fueled a 20% duty on select goods. Bessent’s comments reflect escalating tensions: “Delisting is on the table,” he said, framing it as a tool to counter “unfair trade practices.”

Market reactions have been volatile. Alibaba’s ADR rose 3.4% to $107.73 last week, while PDD and NetEase ADRs surged 2.4% and 5.4%, respectively—moves Goldman attributes to short-covering amid uncertainty. Yet the Hang Seng Tech Index has lost over $350 billion in market value since March, as investors price in risks of broader sanctions.

The Domino Effects

UBS strategist James Wang warns that delisting could slash liquidity and valuations. Chinese firms relisting in Hong Kong might face narrower investor bases, reducing valuation multiples by up to 20%. Aberdeen Investments’ Bush Chu calls U.S. restrictions a “serious risk,” noting the tech sector’s vulnerability.

Meanwhile, Goldman’s broader economic outlook darkens:
- U.S. recession odds now sit at 45% as tariff-driven inflation pushes core rates to 3.5% by year-end.
- China’s 2025 GDP growth could drop to 4.0% from 4.5%, with tariffs alone shaving 2.2 percentage points off growth.

The Bigger Picture: Why This Matters

The $2.5 trillion sell-off is an extreme scenario, but it underscores a systemic risk: the U.S. and China are no longer just trading partners but financial adversaries. Cross-border capital flows—once a stabilizer—are now a battleground.

Investors are already hedging. Hedge funds have ramped up short-selling at the fastest pace since 2008, per Goldman’s data. The Federal Reserve, anticipating a slowdown, is primed for three rate cuts in 2025.

Conclusion: The Cost of Decoupling

Goldman’s analysis isn’t just a doomsday forecast—it’s a stress test. A full decoupling would erase trillions, destabilize markets, and force firms to choose sides. Yet even partial measures—like delisting ADRs—could trigger a re-rating of valuations and liquidity crises.

The numbers are clear: $2.5 trillion isn’t just a headline—it’s a warning. As Bessent said, “All options are on the table.” Markets, however, are betting that cooler heads will prevail. For now.

The path forward hinges on diplomacy. Without it, the world’s two largest economies—and their investors—face a high-stakes game of regulatory chicken. The stakes? Nothing less than the stability of global finance.