http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina10
7a.xml
China Threatens "Nuclear Option" of Dollar Sales
By Ambrose Evans-Pritchard
The Telegraph UK
Wednesday 08 August 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 decisions 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 Treasury 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.
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