China threatens "nuclear option" of dollar sales

[BaronVonBigmeat]

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



It sounds like China now has almost as much control over the dollar as the federal reserve. If they dump their dollars, everything you buy from China would become more expensive. Likewise, everything we still manufacture would become cheaper to them. I don't think they will do it because it would be bad news for their export-dependent economy, but still, the fact that they are talking about it openly (while we openly discuss possible sanctions) makes me nervous. In the 1920's we had a credit bubble, then the Smoot-Hawley trade sanctions, then the depression. Now we've got a credit bubble, and almost as if on cue, politicians talking about big trade sanctions.

 

[Ruby]

I agree that its doubtful China would do it like that, they would also get hurt.

The bigger fear is that China seems to be better at thinking long term and America seems to think more short term. I suspect China will keep reducing their reserves while they have value and building reserves in more stable currency and the Euro is looking like the next real stable currency, so they have options as long as they are willing to do it over a long term and not do anything too quickly which is how they do seem to be proceeding thusfar. They also need to shift away from relying so much on the american markets but there also appear to be rising markets elsewhere so they have more options there as well.

America just has to have its own plan to deal with shifts in the global economy and the shifts of power that are occuring. The shifts and changes are inevitable, we just need a good plan so that we adapt well. We have gotten ourselves into such a bad spot now with war and so much debt, it really is gonna hurt our ability to adapt in painless way.

 

[Bullypulpit]

Given that China owns a large chunk of US debt, our economy will tank if they dump it. If that's not a threat to national security, what is? Just another episode of "Thank You President Bush!".

 

[JeffWartman]

Given that China owns a large chunk of US debt, our economy will tank if they dump it. If that's not a threat to national security, what is? Just another episode of "Thank You President Bush!".

It's both parties fault, not just a Republican vs. Democrat thing. Clinton was very close to China, and we need to understand that the Democrats have as much to do with this as the Republicans.

 

[RetiredGySgt]

It's both parties fault, not just a Republican vs. Democrat thing. Clinton was very close to China, and we need to understand that the Democrats have as much to do with this as the Republicans.

No No. Forget about Clinton taking bribes from China and OPENING markets to them, selling them classified material, taking huge payments for his campaign, this is all about Bush, WHY just think if you research this you will find that China bought all the assets it has in the US since January 2001. That all the trade policies with China were passed since January 2001.

Come on this is all Bush's fault, no intelligent person with an ability to read, write and hear could ever belief anything else. No partisan bullshit here at all.

 

[Ruby]

No No. Forget about Clinton taking bribes from China and OPENING markets to them, selling them classified material, taking huge payments for his campaign, this is all about Bush, WHY just think if you research this you will find that China bought all the assets it has in the US since January 2001. That all the trade policies with China were passed since January 2001.

Come on this is all Bush's fault, no intelligent person with an ability to read, write and hear could ever belief anything else. No partisan bullshit here at all.

I would agree that this problem is the fault of both parties but it is Bush who has taken this problem to new heights. We are borrowing at a pace faster than the speed of light due to a war that the Bush administration started. Think of ALL the money and debt we wouldnt have if we had not started the war in Iraq, think of all the money that we have yet to borrow are going to spend in the future on this war. Bush exacerbated this problem to a very high degree.

 

[RetiredGySgt]

I would agree that this problem is the fault of both parties but it is Bush who has taken this problem to new heights. We are borrowing at a pace faster than the speed of light due to a war that the Bush administration started. Think of ALL the money and debt we wouldnt have if we had not started the war in Iraq, think of all the money that we have yet to borrow are going to spend in the future on this war. Bush exacerbated this problem to a very high degree.

BULLSHIT, plain and simple.

 

[Diuretic]

BULLSHIT, plain and simple.

BULLSHIT, plain and simple

 

[JeffWartman]

BULLSHIT, plain and simple.

Not if you understand economics.

If Bush didn't turn a surplus into a deficit the problem wouldn't be half as bad.

 

[JeffWartman]

This is a very important issue.

China has about the same power to effect our currency as our own government does, thanks partly to the policies of President Bush.

 

[Ruby]

BULLSHIT, plain and simple.

So you deny the reality that we are borrowing from China to fund the war?

 

[RetiredGySgt]

So you deny the reality that we are borrowing from China to fund the war?

Really? Provide a link that shows our Government making official loan agreements with the Chinese. I can go find the examples of when Clinton authorized us to provide them with highly classified information and equipment. I can provide the information of when Clinton gave them more legal status to buy and trade in America. I can also provide information that shows Clinton and Gore were probably taking bribes from the Chinese.

 

[Ruby]

Really? Provide a link that shows our Government making official loan agreements with the Chinese. I can go find the examples of when Clinton authorized us to provide them with highly classified information and equipment. I can provide the information of when Clinton gave them more legal status to buy and trade in America. I can also provide information that shows Clinton and Gore were probably taking bribes from the Chinese.

http://www.csmonitor.com/2007/0116/p01s01-usfp.html

But to pay for the ongoing wars in Iraq and Afghanistan, the US has used its credit card, counting on the Chinese and other foreign buyers of its debt to pay the bills.

and

The US can certainly afford the war, says budget analyst Stan Collender, a managing director of Qorvis Communications in Washington. But the spending is taking resources from other areas, he notes. Because the US is borrowing to finance the war, the cost will be borne by future generations. "And it's still going to be one of the most expensive wars we have ever fought," he says.

Unlike in previous major wars, the United States has cut taxes at the same time it has increased military spending. "It's fair to say all of the money spent on the war has been borrowed," says Richard Kogan, a senior fellow at the Center on Budget and Policy Priorities, a think tank in Washington. "But eventually everything has to be paid for."

http://www.chinadaily.com.cn/english/doc/2005-06/16/content_451996.htm

Meanwhile, the United States borrows deeply from China to sustain its national debt; as of April, China's central bank held $230 billion worth of U.S. Treasury bonds.

http://www.theatlantic.com/doc/prem/200510u/nj_schneider_2005-10-25

The U.S. budget deficit is financed by borrowing. More and more of that money comes from China, now the United States' second-largest lender, after Japan. China's investment in U.S. government debt has more than tripled in the past five years, from $71 billion in 2000 to $242 billion in 2005.

http://www.globalpolicy.org/socecon/crisis/tradedeficit/2006/1003stiglitzfixecon.htm

The International Monetary Fund meeting in Singapore last month came at a time of increasing worry about the sustainability of global financial imbalances: For how long can the global economy endure America’s enormous trade deficits — the United States borrows close to $3 billion a day — or China’s growing trade surplus of almost $500 million a day?

http://www.aei.org/publications/filter.all,pubID.26415/pub_detail.asp

The United States borrows a great deal from the rest of the world, and China is a major lender.

We borrow money from China and that has increased a great deal in the last 5 years (Bush admin) and the largest reason is the war, the facts couldnt be plainer.

 

[Gunny]

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



It sounds like China now has almost as much control over the dollar as the federal reserve. If they dump their dollars, everything you buy from China would become more expensive. Likewise, everything we still manufacture would become cheaper to them. I don't think they will do it because it would be bad news for their export-dependent economy, but still, the fact that they are talking about it openly (while we openly discuss possible sanctions) makes me nervous. In the 1920's we had a credit bubble, then the Smoot-Hawley trade sanctions, then the depression. Now we've got a credit bubble, and almost as if on cue, politicians talking about big trade sanctions.

Maybe we can buy them off like Clinton did N Korea. THAT worked well, didn't it?

Wonder how long the appeasers are going to allow every two-bit nation to extort from us.

 

[Diuretic]

Memo Gunny - Clinton is not in office....this is 2007

 

[Bullypulpit]

Really? Provide a link that shows our Government making official loan agreements with the Chinese. I can go find the examples of when Clinton authorized us to provide them with highly classified information and equipment. I can provide the information of when Clinton gave them more legal status to buy and trade in America. I can also provide information that shows Clinton and Gore were probably taking bribes from the Chinese.

No need for loan agreements when China buys US debt in the form of treasury bills and other financial instruments.

 

[RetiredGySgt]

No need for loan agreements when China buys US debt in the form of treasury bills and other financial instruments.

Ahh I see, so your in favor of a law that restricts those instruments to ONLY US citizens? Or is just China to be denied?

 

[Dirt McGirt]

Does anyone else see the irony of a socialist-communist nation using the free market to threaten economic ruin on a capitalist nation?

 

[Diuretic]

Does anyone else see the irony of a socialist-communist nation using the free market to threaten economic ruin on a capitalist nation?

Dirt, fair dinkum, they are about a socialist/communist as my arse. It's a totalitarian, single-party state with an economy that is almost hyper-capitalist.

There is some irony in it. The way that the peasants and the poor are being treated in China, they need a revolution

 

[Bullypulpit]

Does anyone else see the irony of a socialist-communist nation using the free market to threaten economic ruin on a capitalist nation?

China...? Communist...? That China's Politburo and ruling party still claim to be communist must have Marx and Engels spinning at high rates of speed in their graves. China is a one-party fascist state which does nothing more than pay lip service to Mao's revolution. The oligarchs leading China make the most avaricious US CEO look like a bad amateur.