China threatens 'nuclear option' of dollar sales

Discussion in 'Economics' started by Trendytrader, Nov 7, 2007.

  1. Looks like China has implemented the "dollar nuke" attack. Can't say we weren't warned

    China threatens 'nuclear option' of dollar sales
    By Ambrose Evans-Pritchard
    Last Updated: 8:39pm BST 10/08/2007

    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.
  2. nitro


    Nuclear option = $1.3T???? :confused:

    Sheesh, we could buy them out in two days of selling in SIFs alone. Thats a firecracker, not a nuke. If they said $20T I would pay attention.

    I think this stuff is funny.

  3. Selling SIFs who the hell wants to buy anything that has US$ marked on it?
  4. Digs


    USA is stupid to allow such a position to occur.

    USA beat USSR by economics when the cold war (supposed) to have ended. USSR went broke.

    So who owns who now ! USA for rent, landlord China.
  5. nitro


    You think $1.3T is real money? For crying out loud, that is less than Merril Lynch holds in assets!

    Going to economic war with the US is as stupid as going to war against it in the traditional sense. Even if you win, which has zero chance, you lose.

    They are exiting because they want to preserve their money, not for any other reason. It is pure and simple economic logic.

  6. Issue we have is that we have made many enemies who would be more than happy to have the US knocked out of the way econimically and geopolitically.

    China, Russia, Middle East (to many to name), Venezuala......
  7. Can our politicians be more stupid????

    The main reason that inflation has been so low for the past 10 years has been the influx of Chinese-made goods, keeping an incredible array of products affordable for all Americans.

    A stable yuan/$ relationship benefits both trading partners.

    Last I checked, we aren't particularly in need of lower unemployment in America (where I live in the northern Rockies, companies are facing difficulties in finding workers), so what the hell are these economic dumbells in Washington thinking? Sure, the economic change involved with shifting the manufacturing of goods from expensive locations to inexpensive locations can be uncomfortable. But economic change unleashes all sorts of opportunities and resources which would be tied up in the stagnation enforced by trade protectionism.
  8. nkhoi

    nkhoi Moderator

    Finally the Communist Party figure out how to beat the Capitalist at their own game.
  9. that money is paper money. the depreciation of dollar is another kind of inflation. Chinese government is stupid. they should learn how to diversify!

    hold such a large DOLLAR position, man,.... if they dumped, dollar will crash, their relay on export economy will crash. Chinese goods are cheap so far, but they are of low quality, the only thing keep their competetive is their goods are cheap, they will be kicked out of the global competetion!

    US economy sure will suffer. more rate cut, more problems. like canker sour, can not touch it!
  10. If you've done any business in China (as I have for the past 10 years), you'll know that the they are only communist in terms of political control. When it comes to business, they are more purely capitalist than Europe or the U.S.

    Just ask the 100+ billionaires that have been created in China in the last decade. :cool:
    #10     Nov 7, 2007