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.
The market for debt is fungible so at a deep enough discount the saudis or the iranians or the venezualeans will buy it....Oh I mentioned this threat from the PRC last years and everyone flamed me. So I guess I was right twice this century.
This story brought to you by the people at Lear Financial.
While most of economic “science” is just voodoo BS, supply and demand actually works. If the Chinese flood the market with bonds, the value of bonds will go down and the Chinese investment will go into the crapper. That would hurt the Chinese as much as anybody.
Let’s see... Value of dollar drops. Chinese products more expensive. Americans buy less Chicom crap. China economy tanks.
Conversely... Chinese products more expensive. US products become more competitive. US consumers buy US products. US economy soars after brief recession. Dollar recovers.
Long-Term results... US economy strengthened. Consumers soured on Chinese products. Astute investors have great retirement.
While it might cause a temporary recession, it would create some great buying opportunities for long term investors.
Thank you.
The Chinese can sell their USTs to someone else. True, they can dump the USTs in a lump sum transaction. That will clearly depress the price of the USTs resulting in them getting less than par value. Someone will pick them up in the market at a discount - maybe even us!
There was this movie with Jane Fonda and Kris Kristofferson called “Rollover.” In this film, the Saudis don’t rollover their USTs. The world degenerates into food riots, looting, total collapse. Hillarious! Someone would buy the debt that the Saudis wouldn’t rollover. Also, can the US default on its debt? Sure, just like Russia. But countries would negotiate new terms so that the US wouldn’t default.
Thanks, but the Chicoms would be selling at a major loss just to spite us and wouldn’t we remain with the same debt obligations we had with China?
Regards
Yes, it is still a USG obligation, the discount doesn’t effect the face value of the obligation or the maturity, it would dramatically alter the yield. The threat is real but it would hurt the fragile Chinese economy more the the US, but the Chinese do not worry about public opinion. A credit crunch would cause panic selling in US dollar debt and equities, unfounded in my opinion but fear and greed psychology are easily released in the US markets. The congress will blink before the Politburo Standing Committee.
Point is the Chinese would badly harm their own economy not to mention losing a pile of money if they dumped the Treasuries or dollar reserves held in cash.
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