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.
In tFistful of dollars - China's trade
surplus reached $26.9bn in June
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.