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
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
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
"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
"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
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.