Thursday, August 9, 2007

China Threatens Dollar Sales

In the Telegraph, Ambrose Evans-Pritchard reports that China has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its $1.33 trillion stash 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.

[. . .]

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.


At RedState, my colleague blackhedd, reveals what these "empty threats" say about China's internal problems:
The big elephant in China's room is inflation, caused by a combination of too many dollars, not enough domestic economy to soak them all up, and the currency quasi-peg that is the cause of the whole political ruckus.

China is caught in a box, and at the worst possible time.

Global markets for nearly every asset class, including commodities, are now in an extremely unsettled state. A secular change is taking place in everyone's attitude toward any kind of risk-taking. This is the very worst time to go to the markets looking for a new home for half a trillion dollars.

The Democratic controlled Senate is considering legislation which calls for trade tariffs against Chinese goods as retaliation for alleged currency manipulation. Treasury Secretary Henry Paulson claims such sanctions "could trigger a global cycle of protectionist legislation."

We should also consider the domestic politics of this China problem. Last night, at a forum hosted by the AFL-CIO trade unions federation, the Democratic presidential wannabees took turn bashing China's currency manipulation.

Hillary warned the United States must deal with China's "currency manipulation."

Obama brands China a "competitor" but not necessarily an enemy and declared, "If they're manipulating their currency... we take them to the mat."

Richardson considers China a "strategic competitor" and said, "We've got to say to China, 'you've got to stop fooling around with currency; you've got to find ways to be more sensitive to your workers'," he said.

Is there any domestic political downside to this China Bashing? I don't see any. But there may be an economic price.

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