Posted on 08/07/2007 10:52:02 AM PDT by blam
China threatens 'nuclear option' of dollar sales
By Ambrose Evans-Pritchard
Last Updated: 6:00pm BST 07/08/2007
The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.
Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress. Shifts in Chinese policy are often announced through key think tanks and academies.
Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.
It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.
Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing's foreign reserves should be used as a "bargaining chip" in talks with the US.
"Of course, China doesn't want any undesirable phenomenon in the global financial order," he added.
He Fan, an official at the Chinese Academy of Social Sciences, went even further today, letting it be known that Beijing had the power to set off a dollar collapse if it choose to do so.
"China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland, and several other countries have reduced the their dollar holdings.
"China is unlikely to follow suit as long as the yuan's exchange rate is stable against the dollar. The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar," he told China Daily.
The threats play into the presidential electoral campaign of Hillary Clinton, who has called for restrictive legislation to prevent America being "held hostage to economic decicions being made in Beijing, Shanghai, or Tokyo".
She said foreign control over 44pc of the US national debt had left America acutely vulnerable.
Simon Derrick, a currency strategist at the Bank of New York Mellon, said the comments were a message to the US Senate as Capitol Hill prepares legislation for the Autumn session.
"The words are alarming and unambiguous. This carries a clear political threat and could have very serious consequences at a time when the credit markets are already afraid of contagion from the subprime troubles," he said.
A bill drafted by a group of US senators, and backed by the Senate Finance Committee, calls for trade tariffs against Chinese goods as retaliation for alleged currency manipulation.
The yuan has appreciated 9pc against the dollar over the last two years under a crawling peg but it has failed to halt the rise of China's trade surplus, which reached $26.9bn in June.
Henry Paulson, the US Tresury Secretary, said any such sanctions would undermine American authority and "could trigger a global cycle of protectionist legislation".
Mr Paulson is a China expert from his days as head of Goldman Sachs. He has opted for a softer form of diplomacy, but appeared to win few concession from Beijing on a unscheduled trip to China last week aimed at calming the waters.
Who will they sell to?
Regards
The Clintons and the Chinese have always gotten along well.
It will not be long before they turn the tables. China is going to beat us with our own stick.
Only a fool wouldn’t have seeen this coming.
Why didn’t you include Bush. He is buddy with them too.
Hmmmmmm. The yuan is tied to the dollar. If they nuke the dollar, they nuke themselves.
Unless they float the yuan, which is what we want them to do in the first place...
Did I get that right?
Destroy the dollar and they destroy their largest buyer of goods. How will all the corrupt Chinese officials feather their nests?
I hope they call it ‘operation footbullet.’
That will be the impact to China.
Count on commies not to grasp the basics of economics.
We could try physical nuke-yew-lar options.
Aw, who cares? We’ll just print even MORE money! Wheeee!
Noboby saw this coming - sheesh
They certainly know how to get the U.S. Congress to react —make threats about money.
Besides, if they want to do that, we could pretty much singled-handedly put the whole country on unemployment. Probably everything they make is sent to the U.S.
And if they dump dollars, who will buy from them? They have more to fear from internal unrest than pretty much anyone, and if we can’t afford to buy Chinese goods, the Chicoms are going to have hundreds of millions of unemployed city dwellers to deal with.
As I said, by hurting us they would virtually tank their own economy given the amount of merch we import from them.
It ain’t gonna happen
Amazing how they pulled a Hilary quote out of their hat...
A word of warning, China, Americans have one heck of a long memory. There are still people who will not buy Japanese made goods. Nor German cars. I have heard more people ask about source countries at markets, gift shops, even stationary stores, seeking to avoid ‘made in China’.
You do not want to see what this is like on a national scale. Your possible joy over ‘bringing the United States to it’s knees’ can have consequences for half a century into the future. No matter what, our economy will recover. Will yours?
“I hope they call it ‘operation footbullet.’ That will be the impact to China. Count on commies not to grasp the basics of economics.”
They need to ask themselves: “Do you hurt the debtor or the lender by decreasing the relative value of the debt?”
Probably save all those people who have too big mortgages, too.
Sucks to be Sallie Mae, et al, but I don’t care.
They have a special relationship.
—A bill drafted by a group of US senators, and backed by the Senate Finance Committee, calls for trade tariffs against Chinese goods as retaliation for alleged currency manipulation.—
Max Baucus (D - Mt.) is the Chairman. He is up for re-election in 2008. This tension may be more bluster than substance, both on the RATS’ and on China’s part. But stranger things have happened...
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