China threatens ‘nuclear option’ of dollar sales

2007-08-14

Richard Moore

Original source URL:
http://www.sandersresearch.com/index.php?option=com_content&task=view&id=1303

China threatens 'nuclear option' of dollar sales
By Ambrose Evans-Pritchard - Telegraph
Aug/10/2007

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. . .

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".

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.

[published August 9, 2007, link]
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