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.