China threatens to trigger dollar collapse

[Banquo's Ghost]

I'd be interested to read Orgahs' views on the not-so-subtle hints of the Chinese that they may be prepared to sell dollars to trigger a collapse in the US currency. I am no economist but I know there are students of that discipline among us.

It seems to me that energy power and economic leverage are weapons that have transferred from the US to other powers and make it vulnerable - especially since the country has accrued so much debt recently. What can be done to reduce the risk and if desirable to do so, will those choices be palatable to the electorate?

Spoiler Alert, click show to read: 

China threatens 'nuclear option' of dollar sales

By Ambrose Evans-Pritchard

Last Updated: 1:41am BST 09/08/2007

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.

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 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. 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.

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 June.

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.

[Rodion Romanovich]

Interesting... Another good reason to pull out of Iraq, I guess.

[naut]

Scary prospect.

[Sigurd]

Are China in such a position that they don't need to buy anything using US dollars?
If they decide to get rid of their $ what would they buy their coal for? This necessitates that

1. They either have made new agreements with other suppliers that sell their stuff in other currencies.
Or
2. They are self sufficient on energy resources and other commodities that can be bought using dollars.

The real threat would be that the Chinese will demand another currency for their goods. This would lead the buyers to get this currency and maybe make the shift to sell their goods in the same currency.

I am not an economist, but I would gather that China needs supporters in this enterprise.
I am guessing a new axis of evil?

The US needs her supporters (those who sell their resources and goods in US dollars) to stay committed to the dollar, which traditionally are the big Oil and Gas nations.

The only real threat to the US dollar would IMO be the Euro. If enough nations shift their trade to this currency, then others will be forced to follow. Then there will be an end to the US dollar and maybe the US as we know her today.

[Marshal Murat]

Any attempt to crash the dollar would probably cause a global collapse.

When the US Stock Market goes down precipitously, many other nations follow in her wake, going down. China needs us just as much as we need them, and that isn't going to change in the next couple years. It's all a bunch of smoke and mirrors as China tries to flex her muscle.

[Bijo]

It was I who recommended this course of action to China. It is the truth

[SwordsMaster]

Are China in such a position that they don't need to buy anything using US dollars?
If they decide to get rid of their $ what would they buy their coal for? This necessitates that

1. They either have made new agreements with other suppliers that sell their stuff in other currencies.
Or
2. They are self sufficient on energy resources and other commodities that can be bought using dollars.

The real threat would be that the Chinese will demand another currency for their goods. This would lead the buyers to get this currency and maybe make the shift to sell their goods in the same currency.

I am not an economist, but I would gather that China needs supporters in this enterprise.
I am guessing a new axis of evil?

The US needs her supporters (those who sell their resources and goods in US dollars) to stay committed to the dollar, which traditionally are the big Oil and Gas nations.

The only real threat to the US dollar would IMO be the Euro. If enough nations shift their trade to this currency, then others will be forced to follow. Then there will be an end to the US dollar and maybe the US as we know her today.

They can get their coal from Russia. They've done it before

[drone]

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.

We can kill our housing market just fine without outside influence, thank you very much.

[macsen rufus]

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.

In light of this quote it's probably a bit inflammatory to title the thread "China threatens..."

China is making the point that it could retaliate, if necessary. It has been known for years that China owns most of the US govt's debt, though I don't really understand how or why the US allowed such a situation to arise. Of course, living off credit whilst earning less than you're spending might cover the cracks for a while, but it doesn't alter the facts that your economy is screwed. So long as the public see new Chevvies in the drive and have full tanks why worry about the way the economy's going?

The article certainly makes it look as though the US is vulnerable on this one, but I quite agree with others that if the US dollar gets deflated big time, then everone will feel the shock.

As for Clinton:

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".

Is a bit rich, isn't it, when for most of the past 50 years the rest of the world has been hostage to decisions taken in Washington and the Federal Reserve. Sauce, goose, gander etc etc....

[Husar]

It was I who recommended this course of action to China. It is the truth

Well, which US companies ship their stuff to Europe?
I want to buy some things once they're dirt cheap.

[Seamus Fermanagh]

They're betting, based on on displayed political will, that we are a bunch of woosies.

They know that kicking the dollar into the gutter will create a world-wide economic crisis event not rivalled since the 1920/30s. They also know that they'll take it on the chin too. They don't really want that.

What they believe, however, is that we fear such privations more than they and that we will, therefore, back off on this pressure to re-value the yuan and/or shut up about our stupid copyrights and let them make what they want when they want it and how.

This isn't completely a bluff, they're just betting that we don't have the stones to call at these stakes.

Heavens, all they really need is for the USA to back off for about 15 months -- and then they can be reasonably sure that the new occupant of the oval will not pick up this ball and run with it. It's an easier bet to make when you win simply by making the other person pause for a while -- they don't have to win outright.

[Agent Miles]

The implied threat is that if the Chinese communists don’t want to invest in the U.S., then no one will. However, if the commies sell or dump 1.33 trillion USD, then the U.S. will still have 1.33 trillion USD invested in its economy, we just will be paying dividends to someone else. The countries that will buy the T-bonds from the Chinese will do so because they know that this is a wise investment.
When the Chinese invest their trade surplus in U.S. T-bonds, our government loans the money to banks that make more money with it by in turn loaning it to businesses. We then return their investment to China with interest and keep the profit for ourselves. This sounds good to me.
China is potentially a great market for our goods. The problem is that you may sell X number of a product to China, only to find that the Communist state run industry has illegally pirated it and sold 100X. Of course, we should do something diplomatically and then economically to stop this. Communist China is about a generation away from going bye-bye the way that the Soviet Union did. Committing acts of economic suicide will only hasten this.

[DemonArchangel]

I don't think it's the government that pirates American/Foreign stuff. Piracy in China is rather...individualistic activity.

[Crazed Rabbit]

Them selling off their T-bonds won't change the amount in circulation. The gov't uses T-bonds and the like to control inflation - buy up some from the public to lower the money supply, less inflation, sell some to increase the supply and increase inflation (to avoid deflation).

Of course, such a vast liquidation would lower the price of the T-bonds. I'm not completely sure on how exactly this would effect the dollar.

But a crash of the dollar would make all their exports worth less, and make American exports more attractive to other countries (I think).

In light of this quote it's probably a bit inflammatory to title the thread "China threatens..."

China is making the point that it could retaliate, if necessary.

China has pegged its currency to the dollar, which is not free market and helps their exports unfairly.

I need to crack open my econ book again...

CR

[rory_20_uk]

China is continuing to purchase American bonds, which causes the bond price to be supported. If they stop buying them, or worse, start selling them their value will decrease. Then the amount that America pays for each unit of debt will increase.

Compared to fighting a war, it is a very effective way and a comparatively cheap way of doing a hell of a lot of damage to, as people have pointed out, everyone.

If there is then this uncertainty in the dollar, and if the USA is unable to stabilise its own currency (China has too great reserves to allow this to happen easily) countries might look elsewhere for the new stable standard. If the UK wasn't so tied politically to the USA it might be the £, but I imagine that the Euro will the choice.

China makes things that the world wants. It could even barter with countries for goods if push came to shove. If Europe and the USA suffered meltdown, there's still large markets in Africa and South America that could help take up the slack.

[Don Corleone]

It would be rather shortsighted of China to execute on such a strategy, and they're shrewd enough businessmen that I suspect they know it better than we do and this 'threat' has little teeth...

Consider it for a second. Yes, it would be very painful for the USA to endure such a move. I think domestically held T-bills (by institutions such as pension funds) still significantly outweigh foreign holders, but of course China and other foreign held T-bill holders do hold a significant minority stake. Their move would have some impact, without a doubt.

However, eventually, the US would be able to stabilize its currency. And there's a reason this strategy is referred to as 'the nuclear option' by the Chinese themselves. Two long term affects that would come from such a move: 1) China would help the world's population (because it would reach much further than just America's shores) regress from consumerism... they'd be drying up their own markets and 2) it wouldn't be a killing blow and I don't think they're prepared to engage in an economic war with the US. We could do a few nasty things ourselves in response, such as currency speculation on the Yuan, targeted sell-offs in their larger publicly held companies, refusing to allow them access to American financial markets (we sell a lot more than T-bills in New York)...Basically, they'd revert to approximately 1983, and they really don't want that.

I think they're not happy about the end of the ride on the Yuan, and in truth, they're not doing anything patently unethical by doing this (fixing the value of the RMB to the dollar). They are far from the only country that does this. I'd be surprised if they actually follow through with this plan though. What I don't understand is why the US stance is so strident. Rather than trying to force China to delink their currency, I don't know why we don't press them to tinker with the ratio (maybe now, 1 dollar= 7 RMB?)

[Rodion Romanovich]

because they know that this is a wise investment.

The problem is, the debts caused by the Iraq war, and the threat of an Iran war which would cause even greater debts in the future, means that it may not be entirely wrong to reason that it is no longer as wise an investment as it once was.

It will be interesting to see whether China is doing this out of self-preservation to avoid losing much on a possibly falling dollar, or in order to pressure the US government to agree to something. The latter case is probably more dangerous, as an economical crash caused by the former is likely to repair itself within a decade or two as in all historical examples of crashes (purely speculation-caused economical crashes can be repaired fast because all production machinery and educated workers remain). A political crisis with global tensions between superpowers, however, could remain much longer and with more severe consequences.

[Alexander the Pretty Good]

I'd be bettering against our fortitude, too.

[Lorenzo_H]

Americans, its your economy, not mine. That, I'm glad of.

[Xiahou]

Not much to add to what Seamus, Don and others have said. It's a bluff, plain and simple.

Also, adding to what Don said, I believe it's mainly Democrats that are making a cause out of de-linking Chinese currency- I imagine it plays well with their union interests.

[Ice]

It would be rather shortsighted of China to execute on such a strategy, and they're shrewd enough businessmen that I suspect they know it better than we do and this 'threat' has little teeth...

Consider it for a second. Yes, it would be very painful for the USA to endure such a move. I think domestically held T-bills (by institutions such as pension funds) still significantly outweigh foreign holders, but of course China and other foreign held T-bill holders do hold a significant minority stake. Their move would have some impact, without a doubt.

However, eventually, the US would be able to stabilize its currency. And there's a reason this strategy is referred to as 'the nuclear option' by the Chinese themselves. Two long term affects that would come from such a move: 1) China would help the world's population (because it would reach much further than just America's shores) regress from consumerism... they'd be drying up their own markets and 2) it wouldn't be a killing blow and I don't think they're prepared to engage in an economic war with the US. We could do a few nasty things ourselves in response, such as currency speculation on the Yuan, targeted sell-offs in their larger publicly held companies, refusing to allow them access to American financial markets (we sell a lot more than T-bills in New York)...Basically, they'd revert to approximately 1983, and they really don't want that.

I think they're not happy about the end of the ride on the Yuan, and in truth, they're not doing anything patently unethical by doing this (fixing the value of the RMB to the dollar). They are far from the only country that does this. I'd be surprised if they actually follow through with this plan though. What I don't understand is why the US stance is so strident. Rather than trying to force China to delink their currency, I don't know why we don't press them to tinker with the ratio (maybe now, 1 dollar= 7 RMB?)

Pretty much. The Chinese would never dump A trillion plus dollars of bonds at once. That's just suicide because what's bad for the American economy is bad for the world economy. Everything is interlinked these days. That would be horrible idea which would hurt everyone.

What would happen is the there would be so many bonds for sell, our 10 year treasury note would drastically fall. No one would buy it because of it's low value. As a result people would invest like crazy since interest rates are so low. To combat this, the FED would drastically raise rates, crushing the inflation caused by all these bonds being for sell. This would result in ungodly rates on things like student loans, cars, and houses. This would hurt our economy. After the currency and our economy are stabilized however, the FED would lower rates. Game over.

China would never do this. We could easily damage them much more than they could hurt us. This is a hollow threat and would benefit no one.

[Sigurd]

They can get their coal from Russia. They've done it before

This changes nothing... Russia wants US dollars for their coal. Coal as with oil is traded in US dollars world wide.

[SwordsMaster]

This changes nothing... Russia wants US dollars for their coal. Coal as with oil is traded in US dollars world wide.

Yes. As long as it is a reliable currency. As soon as it ceases to be a reliable currency, which is what China is threatening to do, that might change. In fact, I'm quite convinced it will change.

[Mikeus Caesar]

And in today's news, China caused the dollar collapse, causing chaos in the Western world.. When asked why they did it, the Chinese premier responseded by saying 'he did it for the lulz'.

[drone]

If China causes the dollar to collapse, how are all the WoW farmers going to unload their gold? Lazy short-attention-span Americans are their main market!

[Bijo]

Well, which US companies ship their stuff to Europe?
I want to buy some things once they're dirt cheap.

*evil German accent from Indiana Jones III* Zis information will cost you.

[Geoffrey S]

As said, as long as the dollar is reliable the wouldn't want or need to do this. Of course, should the balance tip due to something like the ever-expanding US debt or OPEC pricing oil in euros things could change rather quickly. The Bush administration hasn't set up a very reliable foundation of the US economy.

[spmetla]

So with these threats from China would it be unwise of me to invest maybe 20% of my savings in Euros and 10% in something like gold? I regret not putting some of my money in Euros when the dollar was about equal with it (not that I have much to invest), would it be a good time to jumpship, or at least make arrangements to get off at the next port?

[Ice]

So with these threats from China would it be unwise of me to invest maybe 20% of my savings in Euros and 10% in something like gold? I regret not putting some of my money in Euros when the dollar was about equal with it (not that I have much to invest), would it be a good time to jumpship, or at least make arrangements to get off at the next port?

Gold always is solid. I forget the ungodly amount it has gone up in the last 5 years.

The Euro is probably good too. I can't give any promises though. Both would be wise investments.

[Papewaio]

Gold always is solid. I forget the ungodly amount it has gone up in the last 5 years.

Gold was steadily trending down until US invaded Iraq. Gold goes up in the time of conflicts. However I would not bet on the Gold price always going up as it does go down. I graduated around the time when the price of Gold hit rock bottom and 90%+ of Gold explorers (Geos) were layed off from the mines. Apart from being seen as a better bet in times of conflict (particularly in the conflict zones or the countries at conflict)... as it is 'exchange rate' isn't as subjective as currencies during those times... it has very little industrial use, most of its important is for the magpie effect...'oohhh shiny!'

=][=

If China conducts a trade war with the US it will have a knock on effect on Aus.

US buys Chinese goods, China buys Australian raw materials to make into goods to then sell... so if the US stops buying, then it has a large percentage knock on effect to Aus...