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.
Where do you get that crazy idea? The US dollar is at historic lows, and yet GDP growth is still hummin’ right along.
There’s no correlation between Chinese GDP and the value of the yuan.
I hope they do. We need to rid ourselves of their threats now. We should never have given the MFN status and dropped our tariffs in the first place. What ever disruption in our economy they cause will force a correction that should happen anyway. Better now than later.
If this ... "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."
.. is a valid statement ... that would mean (as I understand) ..
(Very simplistic) ... 20 years ago, they bought $100 of certificates at, say $75 ('cause we needed/wanted the money) ... and we promised to buy 'em back for $125.
If I'm still thinking correctly ... those numbers were based on an even exchange ... say 1000 yen = $100.
Now, our $100 of 20 years ago is worth only $75 ... and if the yen is now 750/$100 ... if they want to redeem .. we win ... if the yen is say, 2000/$100 we lose.
I can't stay here longer to reply, I drive truck and go out at 3AM ... need to sleep ... but I'd be curious to know if I'm following that.
And of course, if you ARE full of crap ... it's nice to know I have company.
The short version goes something like...”I owe you a hundred dollars - I have a problem. I owe you 1.3 trillion dollars - YOU have a problem.”
Wrong. Their currency is pegged to the u.s. dollar at a rate determined by them. A falling u.s. dollar means a falling yuan, making them more competitive to the rest of the world. Meanwhile, selling our bonds they hold sends interest rates up because rates rise when bonds fall. Net, net, it hurts us and them.
Dumb knee jerk reaction on China’s part. We will take our time... close opportunities here... a little there.... slowly we’ll block China from all sorts of economic gains... before long they’ll be on the outside looking in.
I already said that it hurts us *and* them. But the point made in this article is that China is threatening to dump US treasuries because the US is considering taking actions that would force China to float the yuan.
There are things that the US can do via the WTO (with support from Japan and the EU) to force the Chinese to float the yuan...and they know it. That’s why they’re rattling their saber on this issue.
[the Johnsons load their guns and point them at Bart. Bart then points his own pistol at his head]
Bart: Hold it! Next man makes a move, the nigger gets it!
Olson Johnson: Hold it, men. He's not bluffing.
Dr. Sam Johnson: Listen to him, men, he's just crazy enough to do it!
Bart: [lower register]
Drop it! Or I swear I'll blow this nigger's head all over this town!
[higher register]
Bart: Oh, lo'dy, lo'd, he's despit! Do what he sayyyy, do what he sayyyy...
[the Johnsons drop their guns. Bart jams the gun into his neck and drags himself through the crowd and towards the station]
Harriett Van Johnson: Isn't anybody going to help that poor man?
Dr. Sam Johnson: Hush, Harriet, that's a sure way to get him killed!
Bart: [higher register]
Oooh! He'p me, he'p me! Somebody he'p me! He'p me! He'p me! He'p me!
[lower register]
Bart: Shut up!
[Bart places his hand over his own mouth, drags himself through the door into his office]
Bart: Ooh, baby, you are so talented! And they are so DUMB!
They'll sell to each other - lots of Chinese.
With what money? Counterfeited North Korean hundred dollar bills? They don’t sell to us and the Chinese Communist Party will join Nicolai Ceaucescu within five years.
So let’s declare all Chinese imports banned.
This p*ssing match is going to happen at some point.
Let’s get to it. Right now.
When the notes come due....
I knew you were involved!
"Greed is good." -- Gordon Gecko.
Ford figured it out when he paid his assembly line workers enough money to buy a Model T. That the Chinese have not “gotten it” for this long is a function of their weird left-over communist ideas...
Well don’t blab it all over everywhere...
:)
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