Thursday, August 09, 2007

China threatens 'nuclear option' of dollar sales

From the UK Telegraph courtesy of

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.

here for the rest.

So, the two or three people with whom I've had arguments about this issue, and who know enough about economics to even know what I'm talking about here, have utterly poo-poo'ed my fears about how much of our debt China owns. "They'll never sell 'em off," they've said. "It's totally against their interests to do so. It would wreak havoc with the global, and therefore their own, economy."

Well, there's probably something to all that, but it's not really Chinese irrationality that's got me scared: it's American irrationality. Remember, nobody really believes in all that free market crap, except for maybe the ideologues on TV and their devoted viewers. Politicians and businesses, however, are totally happy to use government to further their economic ends, and China is increasingly becoming economically influential in ways that our wealthy elites don't like. Throw in a little American nationalist arrogance, and we have a recipe for some dangerous trade policy that could conceivably force the Chinese's hand.

Then we're fucked. I mean, the Chinese would be fucked, too, but much less so than us. The only way out of this situation is to get off the dammed deficit teat and start paying down our massive national debt. Until then, they've got our balls in their tight Mandarin grip.

And that's just something we're going to have to get used to for now.