China threatens to trigger US dollar crash
BEIJING: 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 treasury bonds if Washington imposes trade sanctions to force a yuan revaluation.
Two Chinese officials at leading Communist Party bodies have given interviews in recent days warning, for the first time, that Beijing may use its $1,330 billion (658 billion pounds) 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 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 more than $900 billion in a mix of US bonds.
Xia Bin, Finance Chief at China’s Development Research Centre kicked off what appears to be a 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 said.
He Fan, an official at the Chinese Academy of Social Sciences, said that Beijing had the power to set off a dollar collapse, if it chose 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,” he said.
“Russia, Switzerland and several other countries have reduced 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 said.
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 44 percent of the US national debt had left America acutely vulnerable.
Simon Derrick, 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 sub-prime 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 9 percent 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 $26.9 billion in June.
Henry Paulson, the US Treasury Secretary, said any such sanctions would undermine US authority and could trigger a global cycle of protectionist legislation. courtesy telegraph