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.
If you are already a few trillion in debt....You lose.
NFP
You forgot the other side of the coin to devaluation: inflation.
Ping.
“Uh no... If the yuan floats and appreciates by 50%, then China’s GDP just doubled.”
No, it means they have a tailspin of inflation.
Leave me out of this!
In the 1930's, the Germans best trading partner was ... France
I think China won't do what it's threatening. Because it will lead to massive trade sanctions against China, and the inception of a military and economic Cold War against it.
It's historical GDP just doubled (in dollar terms), but its future GDP would collapse. Americans buy Chinese goods not because they're high quality or because they like the Chinese - they buy them because they're cheap. That reason goes away if the dollar collapses. In fact, a dollar collapse means US goods become more competitive against goods from all its major trading partners. The point being that Chinese dollar sales would simply be soaked up by the central banks of countries trying to maintain their currencies' competitiveness. The Chinese think they're the 800 lb gorilla of the world. Actually, they're still in the bottom half - prosperity-wise - of the nations of the world. They're just drunk on the high growth rates you get when you're a poor country. Kind of a like a panhandler getting his first minimum wage job.
Could someone please explain where I am wrong on this but does not devaluation normally follow inflation. Most recessions I believe have a short period of minor deflation, and most prosperity bubbles are accompanied by inflation (hyperinflation is just a symptom of otherwise very poorly functioning economies).
Thus a Chinese dumping of dollar holdings would just eliminate much of the Chinese liquid asset holdings, cause dislocations in the rest of the worlds economies and a depression in China.
China’s vast reserves of dollars are not concentrated in the hands of the central goverment.
Gettting all the “10,000 princes” of the Chinese communist party — who hold those dollars — to act in unison on anything would require an act of God.
Is that the answer to my #22 ??
Most of the FReeper finance types will giggle at the following but it's a start - the Chinese have bought certificates from the U.S. government that we will have to redeem at some point. We use the money they give us for other purposes. When the time comes we have to repay (or refinance).
The trick is that the exchange rate of the dollar against other currencies with which we will have to deal depends on the strength of these certificates. Should the Chinese sell them to someone else at less than their current value, we still have to redeem the face amount when the time comes, but in the meantime the dollar changes with respect to the other currencies as a result of the sale.
But the Chinese also deal in U.S. dollars in other ways, notably in selling us manufactured goods. Should the dollar fall those goods will will cost us "more" dollars and we will purchase fewer goods, or the Chinese will have to lower their prices in dollars and take the loss with respect to the other currencies.
Basically a strong dollar means we can afford to do more business with their manufacturers and a weak dollar means we can afford to do less. They can only afford to force the dollar down if they are willing to face reduced sales to the U.S., perhaps making them up with other customers, more likely simply taking the loss, or rather their manufacturers do, which at the moment is a class of folks intimately tied to the Chinese government. It wouldn't be a popular decision and might start at least a recession in their country.
Of course that would hurt our economy as well. More than theirs? Well, that's the sticky point.
Now, would somebody PLEASE come along and say "BtD, yer fulla crap, here's how it really works..." I'm obviously not an economist. ;-)
But what happens when you know what hits He Fan?
...or, we (if our elected officials had any ba!!s), could just declare to the Chinese that we are officially repudiating all of the debt they hold in the form of US T-Bills.
Then, the Chinese have one of two options: (a) they can shred all of those T-bill notes into confetti for use during the Olympic Games, or, (b) use them to make paper machete boats to float their army across the Straight of Taiwan.
Of course, have the US Government repudiate a massive portion of the Federal debt might unfortunately collapse the world economy, but hey, it’s going to come crashing down sooner or later anyway.
If you owe the bank $100 they own you
If you owe the bank $1.33 trillion (£658bn) you own them.
I owe my mortgage company the equivalent of $100, therefore they own me. If I had managed to wheedle 1.33 TRILLION out of them I think they’d treat me just a bit better...
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