China threatens 'nuclear option' of dollar sales

[EV_Ares]

By Ambrose Evans-Pritchard - The Independent

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.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina107a.xml

[Double T]

1. Looks like 'WE' lost the 'war' without either side firing a shot.

You had to know this day was eventually coming.

[acmavm]

2. And here it is. The destruction of our entire financial system by the

Chinese.

How long have we predicted this?

[whistle]

3. Just what can China do with $1.33 trillion dollars, would then buy Euros with

...US treasury bonds? Would they buy all the hoff and mouth diseased cattle from the UK? Bananas from Guatemala?

Why would they just not go ahead and buy American food or other American products and services in exchange for those dollars? Or is the U.S. economy so screwed up under BushCo that we have nothing the Chinese want?

[Selatius]

4. My God, our greed has finally brought America to its knees.

To think that the Politburo could one day threaten the economic engine of the mighty US economy. It would not be possible except for the collaboration of business interests in pushing unregulated free trade on America and the world.

[OHdem10]

5. Reality:: Do not mess around with your Banker.

China is essentially our banker. We have borrowed the cost
of Iraq War. We for the first time did not raise taxes
to pay for the war. We borrowed the money from China. China
can do anything they wish with regard to Trade Policy
and we cannot do one darn thing about it. China is sending
the message--Don't mess with me. They hold the winning hand.

Likewise all our Corporations will get nervous. All the American
businesses in China???? Sticky wicket.

[Double T]

6. The traitorous corporate and wall street bastards deserve what they're going to get..........

unfortunately the rest of 'US' will be be taken down with THEM.

[Vinnie From Indy]

7. While America is very vulnerable, it is doubtful the Chinese

would actually want to send the world economy into tailspin by selling all their dollars. There are so many facets to that strategy. Who would buy that many dollars? Would the Chinese accept the drastically reduced value of their trillion dollars as they flooded the world with dollars? The Chinese would also not only lose a huge chunk of the consumer engine of American spending that drives their modernization and economy, they would face trade restrictions the likes of which have never been seen before.

In addition, would it not be prudent to consider if there are any positive results from a Chinese nuclear option. Maybe America needs a kick to the groin to understand that we cannot continue to allow multi-national corporations to offshore all manufacturing jobs so easily. Wal-Mart would be in a world of hurt if the Chinese launched an economic attack on the US Dollar.

[charlie]

8. Bushco would love it, though

They've stuffed the treasury with IOUs. Now watch them inflate their way out of their debts.

[many a good man]

9. They are blackmailing us into buying their tainted food and toxic toys

Made in their sweatshops by virtual slaves, many of whom are merely children.

NeoAmericans (combination of neocons and neoliberals) must love this stuff. Their next five year plan has the United States looking more and more like China.