China threatens 'nuclear option' of dollar sales

[kuzadd]

http://www.telegraph.co.uk/money/main.jhtm...cnchina107a.xml

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.

and..................

"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.

Another drama, real-life?

So if the US pushes China, via trade sanctions, will China push back?

[Bonam]

So if the US pushes China, via trade sanctions, will China push back?

Of course, why wouldn't it?

[Leafless]

Of course, why wouldn't it?

The U.S could be foolish to pursue trade sanctions against China.

But it is a moot question who exactly is subsidising whom. Not only do cheap imports subsidise American consumers, but China's large purchases of Treasury bonds also hold down American interest rates, thereby subsidising home buyers. Suppose that overnight the yuan rose by 30%, what would happen? American interest rates would rise as China needed to buy fewer Treasury securities and prices at Wal-Mart would increase. If consumer spending and imports then collapsed, this would certainly reduce America's trade deficit, but in a much more painful way than most Americans have in mind.

http://www.economist.com/finance/displayst...tory_id=9184053

[kuzadd]

Therefore amongst other things, more trouble in the US housing market!

Hmm not something the US exactly needs at this time, now is it?

and all that junk from wal-mart would cost more.

"Not only do cheap imports subsidise American consumers but China's large purchases of Treasury bonds also hold down American interest rates, thereby subsidising home buyers."

These two paragraphs gave me some food for thought

"

Mirror image

This turns the whole debate about China's exchange-rate policy on its head. It is China that has the most to gain from allowing the yuan to rise. If the spat between America and China were to ignite protectionism or financial instability, it could endanger the whole world economy. All the more foolish, therefore, that economic relations are based on misperceptions on both sides. America needs to stop making China a scapegoat for the failures of American policy. Only if it gets its own economic house in order, by boosting domestic saving, will its “advice” to Beijing seem credible. Likewise, China has no right to criticise American policy when its own economy remains unbalanced.

America is right that China needs to revalue, but for the wrong reasons. And arguing that a revaluation helps America's economy makes it less likely that Beijing will act. Moreover, if George Bush foolishly slapped harsh trade sanctions on China, America's economy would be the biggest loser. Likewise, China is foolish to resist a more flexible exchange rate partly because it does not want to be seen as caving in to America's demands, when it is in its own interest. If the world's two leading engines of growth remain at loggerheads, everyone will pay the price. "

[B. Max]

So if the US pushes China, via trade sanctions, will China push back?

No because that would be the end of China's economy and a return of a complete economy to the US.

[B. Max]

Therefore amongst other things, more trouble in the US housing market!

Hmm not something the US exactly needs at this time, now is it?

"

This is actually good news. It is the beginning of the return to reality. The reality that debt has to based the ability to repay, and in order to repay one must produce. The big question is has the lesson been learned both in the US and in Canada.