Thought Theater

Economic Concerns Grow: China Threatens Dollar genre: Econ-Recon

In a growing sign that the U.S. economy is vulnerable, China has hinted that it could liquidate its huge holding of U.S issued bonds if the United States enacts sanctions intended to impact the strength of the Chinese currency...the yuan.

In recent years, China has reportedly amassed over $900 billion of U.S. bonds...a sum large enough to impact the U.S. economy if they suddenly elected to sell large portions of their holdings.

From The Telegraph:

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.

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.

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 news comes at a time when the U.S. economic outlook is particularly uncertain. Inflation, a housing slump, a tightening of credit guidelines and higher interest rates, and the expanding sub-prime lending crisis have left many concerned that a recession is inevitable. Others are hopeful the economy will weather the storm with little more than a slowdown in GDP.

Should China decide to unload its holdings, it would be difficult to imagine the U.S. could avoid a recession. Further, the fact that China is aware of its growing ability to manipulate the value of its currency relative to the dollar only makes it more difficult for the United States to pressure China into more favorable trade scenarios.

The situation is another indication of the shifting global economy and the obstacles faced by the United States as it attempts to remain competitive while at the same time avoiding the loss of jobs that has accompanied that effort.

Some have argued for more protectionist policies, but many feel that such a move would only trigger the enacting of such policies around the globe...creating further economic instability and uncertainty as well as damage the tenuous financial balance that exists. At the same time, many contend that the actions of China to manipulate their currency must be challenged.

From Forbes:

BILLINGS, Mont. (Thomson Financial) - US Treasury Secretary Henry Paulson today defended his 'good cop' approach to China on trade and foreign exchange policy and said the anti-China currency bills now being considered in Congress would only hurt US economic prospects in the coming years.

Baucus countered Paulson by saying that: 'China needs at the very least a nudge. No country out of the goodness of its heart ever lowers a trade barrier.'

In remarks before a forum on community jobs here, Paulson reiterated the administration position that increasing trade protectionism is a 'worrisome trend' that threatens to reduce jobs and income in Montana and other states.

Unfortunately, the free trade approach has led to speculation that corporate influence has led the Bush administration to disregard the plight of U.S. laborers. Clearly, the shifting global economy will continue to present difficult choices for the United States.

Of more concern is the prospect that current U.S. policies have already allowed China to achieve a favorable position which may leave us with limited options and even less ability to force corrective measures and actions.

Comments

1 On August 8, 2007 at 11:06 AM, One DAY wrote —

Per Wiki (yeah I know lousy source, but what the hey....)

Nearly all of the $923 billion average daily trading volume in the U.S. Bond Market takes place between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market. However, a small number of bonds, mainly corporate, are listed on exchanges.

That is the total of China's holdings so why should anyone care......

2 On August 8, 2007 at 3:32 PM, Brett Scott wrote —

We think we have a way of countering the PR value, the leverage this may hold over congress, and the potential impacts of such a move. We offer a place where people may symbolically commit a portion of their savings to a defense fund. We just created the site and will be working to get the word out over the next few days. US Dollar Rescue Web Site

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