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.
You mean the way Russia hung itself w/ the rope we sold to
Nikita Kruschev?
If China unloads its vast currency reserves in the form of
US T’s, US int rates rise presumably, strengthening the USD.
Making dollar-denominated assets more attractive and thus
tunring overseas risk capital into flight capital. And thus drawing
foreign capital away from risky places like China and inviting
that capital into safe havens like....US T’s.
China can use the stick. They can even use a stick that they
manufactured in direct violation of patent rights. We’ll use stealth.
MV
Give this pedestrian a thumbnail sketch of what it's talking about, please.
How does a nation 'buy' dollars?
Why would they?
Why would we sell?
I vaguely understand FRN's ( but not really)
Anyway ... that's your job on FR ... edamucate us dumbo's.
I’m sure the Fed would be glad to buy them at 1 cent to the dollar......
__________________________________________________________
Let’s sell them Rockefeller Center at inflated prices like we did to the Japanese . . . and then buy it back at pennies on the dollar!
Let ‘em. Let’s see what happens to their own banks as a result. Their own banks are in a world of hurt. We stop buying Chinese goods, China’s ‘bicycle economy’ stops moving forward and tips over, leaving their banks with massive uncollectable debt.
And furthermore, who’d buy the paper?
It sounds like they don’t understand economics. Unloading their dollars all at once would be economic suicide for them, not such a bad deal for us.
>>>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?
Touche!
MV
I understand that it has potential significant consequences.
You'd be wise to ask others for advise on this subject. (Now, if you want to talk about anthropology/archaeology I'd be glad...)
bump.
Precisely. China dumps US Treasuries, the dollar tanks, the yuan floats to where it should have been all along, and Chinese products cost more than American products.
We get hyperinflation, surging interest rates, and a recession...but we benefit from a newfound surge in US manufacturing, more jobs, and a stronger long-term outlook.
China gets an enormous drop in GDP, pennies on the dollar for all of those US treasuries that they gobbled up when the dollar was strong, and loses their biggest export market.
In the short term, both nations suffer. In the long-term, the US benefits.
I was under the impression they held U.S Treasury bonds.
For how long? China has a plan that is pretty obvious.
That little comment probably shaved a couple of percent off the existing value of their currency reserves.
This could also help solvesome of our mortgage and consumer debt load problems. Nothing like devalued currency to ease debt burdens. The stock brokers jumping out of windows would be collateral damage.
From the nation that gave us Sun Tsu, China sure has an impressive history of using their stick. NOT.
And how. There goes the Chinese manufacturing industry and the profits that hold their new ruling class afloat. Make my day.
So I borrow a twenny from the guy and give him an IOU. He sells the IOU to another guy for a dime. That other guy asks me for the twenny. I give it to him. How did I lose in this?
“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.”
Please don’t tell me that ‘choose’ is going the way of ‘loose.’
declare the treasury notes held by them to be null and void due to their actions.
That’ll but a crimp in their plans.
Try telling that to your mortgage company.
Let them do it. And then lets us close our ports to their crap in retaliation and laugh as the millions of unemployed across China riot and overthrow the filty old men who enslave them.
And this from a country that puts poison into dog food, medicine, toys and whatever and then sells it to the U.S.
Oh, the horror!
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