Blog
- Dollar to collapse?
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Fistful of dollars - China's trade surplus reached
$26.9bn in June
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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.
