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China Threatens 'nuclear Option' Of Dollar Sales

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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

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

well its happening as we speak.

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Telegraph

Oh dear, this could end badly.

China threatens 'nuclear option' of dollar sales

By Ambrose Evans-Pritchard

Last Updated: 6:00pm BST 07/08/2007

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.

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they have the americans by the balls.

It is still a two way issue. If China did nuke to dollar, every export market they have would get whacked in the fallout. They just do not yet have the home consumer market to take up the slack. So no one wins.

More likely they would fire off a couple of warning shots and hope things did not get out of hand. :ph34r:

Interesting times.

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they have the americans by the balls.

I wonder. If the doors to the American market slammed closed, the consequences for China (and particularly for the Communist Party) could be cataclysmic. What will happen if the Party is no longer seen as being able to deliver prosperity? The reason they're so reluctant to revalue is precisely because they don't want to lose export momentum. Yet the only thing they can get for those exports is more $ ... I would say they are in a bind, too.

That's why it's characterised as a 'nuclear' option. Mutually Assured Destruction.

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If they mean it, this could be very interesting and very complicated. China holds 1 trillion of USD government debt give or take - that's 2 to 4 years worth of US government bond issuance at current rates. If China rapidly dumped even half their holding it would shatter the market instantly, effectively bankrupting the US government or, more likely, forcing it to print money resulting in massive inflation. It's hard to think that the Chinese would want this of course since it would be a phyrric victory. Imagine the consequences - writing off some big chunk of those hard earned foreign reserves, losing your main market overnight, possibly starting a war, that kind of thing....

Anyone willing the Chinese on too much here should consider one question I think - however much the American government pisses you off, would you rather live in a world run by them or the Chinese?

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I wonder. If the doors to the American market slammed closed, the consequences for China (and particularly for the Communist Party) could be cataclysmic. What will happen if the Party is no longer seen as being able to deliver prosperity? The reason they're so reluctant to revalue is precisely because they don't want to lose export momentum. Yet the only thing they can get for those exports is more $ ... I would say they are in a bind, too.

That's why it's characterised as a 'nuclear' option. Mutually Assured Destruction.

And we too would get shot to bits in the crossfire.

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I doubt they'll dump their hard currency as they'll take a bath in the process.

They are, however, probably losing their appetite for duff US treasuries. The Fed sets short term rates and that may be subject to political pressure. I suspect the bond market may be dictating all else however. And I'll bet the risk premium is heading up regardless of what the political climate suggests.

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I think the Chinese fixed the exchange rate deliberately to amass this fortune.

The idea being post peak oil they can vent these off, forcing the Fed to swim against the tide by buying up these dollars and keep the reserve rate artificially high to withstand the inflationary pressure. This would severely handicap US purchasing power, especially in a rising commodities market.

Ergo... More oil and gas heading East out of Russia.

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If they mean it, this could be very interesting and very complicated. China holds 1 trillion of USD government debt give or take - that's 2 to 4 years worth of US government bond issuance at current rates. If China rapidly dumped even half their holding it would shatter the market instantly, effectively bankrupting the US government or, more likely, forcing it to print money resulting in massive inflation. It's hard to think that the Chinese would want this of course since it would be a phyrric victory. Imagine the consequences - writing off some big chunk of those hard earned foreign reserves, losing your main market overnight, possibly starting a war, that kind of thing....

Anyone willing the Chinese on too much here should consider one question I think - however much the American government pisses you off, would you rather live in a world run by them or the Chinese?

Very good point.

If China ran the world the menu at MacDonald's would contain Big Dog and fries.

Then again the Japanese are a sadistic bunch of bas*ards when push comes to shove.

The Chinese are unlikely to want to bite the hand that feeds them.

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Very good point.

If China ran the world the menu at MacDonald's would contain Big Dog and fries.

Then again the Japanese are a sadistic bunch of bas*ards when push comes to shove.

The Chinese are unlikely to want to bite the hand that feeds them.

They'll huff n they'll puff but it would be suicidal for them to nuke the dollar. The shutters would just go up in th US and more likely than not in Europe. The chinese have got to start playing ball and limit growth otherwise we (US and EU) will do it for them.

Edited by vfr

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I wonder. If the doors to the American market slammed closed, the consequences for China (and particularly for the Communist Party) could be cataclysmic. What will happen if the Party is no longer seen as being able to deliver prosperity? The reason they're so reluctant to revalue is precisely because they don't want to lose export momentum. Yet the only thing they can get for those exports is more $ ... I would say they are in a bind, too.

That's why it's characterised as a 'nuclear' option. Mutually Assured Destruction.

That's what you get when you don't use gold as money and think its good to use paper instead.

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This is just political posturing from China. Since the USd is hovering precariously over the 80 level, these so-called threats hold much more capital than they otherwise would. China is just trying to make as much out of the opportunity as possible. Any reckless use of the their foreign currency reserves would draw much condemnation from its own citizens and lead to the Communist Party's greatest bane, social unrest at home. To understand China's strategy, one needs to know the "24 character strategy" which has tempered the ambitions and motives of the CCP and has been a grand strategy that has set the stage for their economic miracle :

“Observe calmly; secure our position; cope with affairs calmly; hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership.” – Deng Xiaoping

Crouching Tiger Hidden Dragon?

Best,

L

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“Observe calmly; secure our position; cope with affairs calmly; hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership.” – Deng Xiaoping

The only problem is, Senate & Congress will tease them as long as it takes to provoke a reaction. Even the calmest tiger will finally roar and snap.

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First of all, no-one knows whats really going on behind the curtain, secondly, this threat is now public. China holds no punches and they have a backup if this becomes economic warfare, Communism. The fact that China is openly standing up for itself shows the lengths the US are going to to hide its economic situation. The US is seriously on the rack with nowhere to hide, it has to start facing up to its problems instead of trying to blame China (and everyone else). The American people know that hard times are coming and many know that the US is to blame for its problems with China, although it doesn't stop them buying the imports(and grumbling about the quality). The Chinese will hold onto the dollar until an orderly exit is in place but only if the US plays fair, it would cause enormous problems around the globe if communication breaks-down. Remember China has the Communist system to fall back on not to mention vast reserves of commodities and technologies sold to them by the West. This is potentially one of the most devastating tragedies the world might ever see if it is mismanaged in a theatre of pride and delusions. <_<

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Remember China has the Communist system to fall back on not to mention vast reserves of commodities and technologies sold to them by the West.

Do you mean they will crack down and send everyone back to the Collective Farm if falling prosperity causes unrest? There's no way of telling if such a policy would work; China is a different place now from the way it was in 1989. Ordinary people are risking everything on the stock market, for goodness sake. I honestly don't think they can afford to let the music stop.

As for the commodities they've been hoovering up, surely those have mainly been turned into export-producing infrastructure, or processed by same? I've never heard that the Chinese have been stockpiling anything except for dollars.

Edit: typo

Edited by huw

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The Chinese will hold onto the dollar until an orderly exit is in place but only if the US plays fair, it would cause enormous problems around the globe if communication breaks-down. Remember China has the Communist system to fall back on not to mention vast reserves of commodities and technologies sold to them by the West. This is potentially one of the most devastating tragedies the world might ever see if it is mismanaged in a theatre of pride and delusions. <_<

I can't see an orderly handover of so much wealth from one nation to another. It worked when the British Empire handed over power to the American Empire - don't forget, Sam and Jack spoke the same language, were possibly both members of the same/similar belief (and possibly lodge). The handover from Sam to Xiao Ming will be less smooth - there will be a lot of misunderstanding and also refusal to accept new realities. It is also not good that the US has soon its elections - it could be time for patriotism and and silly promises. I expect at least some sort of trade or currency war with China. China will finally see the need to buy a lot of gold to achieve its goals and be independet from American paper money.

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Do you mean they will crack down and send everyone back to the Collective Farm if falling prosperity causes unrest? There's no way of telling if such a policy would work; China is a different place now from the way it was in 1989. Ordinary people are risking everything on the stock market, for goodness sake. I honestly don't think they can afford to let the music stop.

As for the commodities they've been hoovering up, surely those have mainly been turned into export-producing infrastructure, or processed by same? I've never heard that the Chinese have been stockpiling anything except for dollars.

Edit: typo

There are still tens of millions of very poor people in China that can easily be promoted to the military, it worked for Mao. Many folks in Russia want Communism back, S America is becoming Communist, etc... The UK and US are different places than 1989 too we are far more communist today and maybe more Communist than China these days :angry:

So you're saying China has only stored pieces of paper for a rainy day?

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