China threatens 'nuclear option' of dollar sales

[Jaga]

Guys,

do you know what would happen if.... China would start selling American dollars?
++++++++++++++++++++++++++++++
China threatens 'nuclear option' of dollar sales
By Ambrose Evans-Pritchard
Last Updated: 1:48am BST 08/08/2007

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.

advertisementIt 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.


www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina107a.xml

[Jaga]

Guys,

I think this is a bit scary stuff. Dollar is already low, how much lower it can hit. This scenario reminds me the period of superinflation in Poland.

[hollister]

Jaga,
You are correct - this is very much in the manner of "it can never happen here" but it is very much a real and terrible possibility. Not only our children's future but our future has been mortgaged out to those we think of at best as unfriendly.
So how will you welcome our new Asian Overlords?

[kaima]

The 'neo-cons' have sold us out, along with the dems that preceded them. At least the Dems balanced the budget, threatening to get our finances back under control. Just a minute ago the NY Times reported "Bush Vows a Veto on Any Tax Increase".

He is the wildest spending, irresponsible liberal I have ever encountered. Neo-con stands for con-artist, certainly not conservative!

It was just a matter of time until our financiers started pulling strings, so I have to give Bush credit for that one - he exported the American habit of pulling financial strings to control people and nations. Now we are getting it in return. I wonder how bad it will be in 20 years.


Kai

[bescheid]

Typical Chinese threats when upset. It must be first considered of the cost to them in cause and effect to them in world prestige. If, perhaps in deed, they were to effect this threatened action. Then, the most folks hurt, would be those in the futures market, a temporary drop in various stock-markets.

All, just short time effects. What the long range effects would be trust lost by currant and future trading partners. For with the large investments placed in China by foreign firms, and not to mention of Chinese accounts currently active in foreign banks, necessary for international trade.

The threat of these accounts becoming frozen by the respective governments, is in self, a chilling counter threat to the Chinese business community.

It would so seem, if the Chinese were to then carry out their threat, then it would be of benefit of the foreign bank accounts {Chinese} to be frozen and accumulated interest on the accounts be confiscated by each respective government of which authority each respective bank would be under. Then at conclusion of the crises, life would continue as usual for all, with the exception of loss to the Chinese of accrued interest payment accumulation on those respective accounts.

It would so seem the Chinese are sailing a battle cruiser built with a glass bottom.

Charles

[Jaga]

I know that Chinese know that if they do it, the global economy would suffer, nobody would be spared. Still, if they would become too frustrated with Americans.... they may do it.

[Bob S]

;D If China continues to add poison to its exports, there may be no one left to threaten. LOL ;D

[kaima]

Part of the answer lies in the 'World Health & Wealth" thread. As Jaga points out, "the global economy would suffer, nobody would be spared". The US economy is so large and overshadows so many other nations that the world does not dare call in our debt without throwing the whole world economy into a tail spin. Now China is threatening to do just that - and we had better get used to hearing the threat, it will be coming more often. We ahve placed ourselves and the world in a very vulnerable position.

Jumping back in time, I was concerned about the same sort of thing around 1980 when Reagan ran up American debt. I was worried about our ability to carry it and wondered if the US economy might collapse before the Soviet Union. That is when I first thought that we owe so much the world MUST carry the debt, or we will suffer a world economy collapse that would make the Great Depression look easy.

Kai

[Jaga]

More problems are coming. Stocks in the US are fallinh sharply the second day in row:

World stock markets tumbled on Friday and central banks in the U.S., Europe and elsewhere continued an unprecedented infusion of cash into the financial system, as concern spread about the state of the U.S. credit market and the complicated array of investments it supports.

On Wall Street, the Dow Jones Industial Average was down nearly 200 points after the first hour and a half of trading on a day that was expected to add to Thursday's 387-point drop. Though still up for the year, Thursday's decline was the second-worst of the year and knocked nearly three percent from the index's value. Other U.S. indexes were down as well

www.washingtonpost.com/wp-dyn/content/article/2007/08/10/AR2007081000689.html?hpid=topnews

[Jaga]

This time I was right signalizing problems in world markets and some type of crash really happened. We will see how long it would last and what it would bring.

Here is more about the impact of the current crisis to Poland:

Warsaw markets head down sharply, tracking US-led global tumble

WARSAW (Thomson Financial) - Warsaw markets fell sharply at midday, with the blue-chip index hitting its weakest levels since March and the zloty dropping to a two-month low, following an overnight equity sell-off in US and Asia.

By 1130 CET Warsaw bourse's main indices - the broad-based WIG and the blue-chip WIG20 - were down by 5.3 and 4.05 pct respectively, with 9 in every ten stocks taking a fall. The zloty was trading at 3.8283 zlotys to the euro - its lowest since June 7.

Central banks worldwide failed to quash investors' jitters with billions of funds supplied to banks over the past week to make cash available for lending and keep interest rates stable, amid signs that credit was drying up. The US Standard & Poor's 500 index is now down for the year.

'We have had major tumbles around the globe for two days and Poland is not the one to buck the worldwide trend,' said Tomasz Ossig, broker at ING Securities in Warsaw. 'The worst could still be ahead of us, as people may start redeeming money from the local mutual funds.'

All WIG20 components were down on the day, led by the bourse's major players: Poland's largest telecom TPSA, its two biggest banks PKO BP and Pekao, its largest oil refiner PKN Orlen and Europe's biggest copper miner KGHM.

Poland's only biotech company Bioton was the hardest-hit with a 18 pct fall after lacklustre results.

The bearish sentiment also weighed on the Polish currency, as investors reduce risk in fear of further and wider falls, economists say.

'In the scope of the next few weeks, you have to take into account that the zloty may fall further as uncertainty on the global markets prevails,' said Piotr Kalisz, senior economist at Citibank Handlowy in Warsaw.


www.forbes.com/markets/feeds/afx/2007/08/16/afx4025428.html

[kaima]

With the instability in the world financial market today, any action by the Chinese would present an insurmountable bump for the world economy today and plunge the world into depression.

I was worried a bit during Reagan's debt run, but this is even a bit more troublesome. It seems to be worldwide and we also have October to get through - the traditional low point in the market year, and the anniversary of the 1929 crash - which was also preceded with market turmoil the summer before.

Kai

[Bob S]

What goes down may come up again. I.E. A few years ago a lady decided to collect the stock certificates of defunct companys after the great stock market crash. During the process of collecting, she decided to do some research of what happened to company. Much to her surprise it was found out that the stock, assets and debts of the defunct companies were acquired by larger companies. The companies that had acquired the assets and debts of the defunct companies offered to replace the certificates of the defunct company with those of the new companies or to buy shares at the current market value. The result The lady that decided to do the collecting was suddenly very wealthy.

[troubledgoodangel]

Let me continue my reflections on China and trading little further. Scott Paul, in Huffington Post today, basing himself on an article in Wall Street Journal, noted with surprise that the Republicans, once staunch supporters of free trade, "are now beginning to despise it." It seems that my prophecies are coming true. The free trade with China, as Paul noted, "impacts [negatively] all sorts of things in the U.S.: jobs, interest rates, the safety of our food and consumer products, our national security, and the flexibility we have in diplomacy"(he forgot the dollar). Could it be any worse? As the dollar has fallen to barely 2.50 z³otych last week, in Poland, I am deeply concerned, for there are rumors that the dollar may fall even further, and this will send thousands of retired Polish-Americans begging for food (we already cannot afford a single loading of gasoline per month!). The free trade with China has been our Trojan Horse. When the Babilonian King, Merodach-baladan visited Hezekiach (that is Dung-Ciao-Ping's visit with President Nixon), "Hezekiah, foolishly showed him all the sources of his power, economic and military." Prophet Isaiah immediately prophesied, that "in punishment, all those riches and people will be carried in captivity to Babylon" (2 Kings 20:12. 17). Has not our wealth been steadily drifting to China? It has! Trade, to me, should not mean a constant deficit and yearly "patching up huge losses." That's not the definition of trade as history has known it for thousands of years! Trade must enrich both parties, and if it does not, it's a highway robbery! The whole economic system of the world needs to be rewritten in a hurry! As per Forbes Magazine, the wealth of 3 richest people, today, "exceeds the gross national product of 48 poorest nations." That's a shame! Forbes has also been reporting, that "1.5 trillion, today, is in 500 hands"! Such disparities show, that unbridled greed has replaced the common sense and interests! We are reaping what we have been sowing - a rampant economic injustice in the world! We must stand up, and not let this happen!

[bescheid]

troubledgoodangel said:

Let me continue my reflections on China and trading little further. Scott Paul, in Huffington Post today, basing himself on an article in Wall Street Journal, noted with surprise that the Republicans, once staunch supporters of free trade, "are now beginning to despise it." It seems that my prophecies are coming true. The free trade with China, as Paul noted, "impacts [negatively] all sorts of things in the U.S.: jobs, interest rates, the safety of our food and consumer products, our national security, and the flexibility we have in diplomacy"(he forgot the dollar). Could it be any worse? As the dollar has fallen to barely 2.50 z³otych last week, in Poland, I am deeply concerned, for there are rumors that the dollar may fall even further, and this will send thousands of retired Polish-Americans begging for food (we already cannot afford a single loading of gasoline per month!). The free trade with China has been our Trojan Horse. When the Babilonian King, Merodach-baladan visited Hezekiach (that is Dung-Ciao-Ping's visit with President Nixon), "Hezekiah, foolishly showed him all the sources of his power, economic and military." Prophet Isaiah immediately prophesied, that "in punishment, all those riches and people will be carried in captivity to Babylon" (2 Kings 20:12. 17). Has not our wealth been steadily drifting to China? It has! Trade, to me, should not mean a constant deficit and yearly "patching up huge losses." That's not the definition of trade as history has known it for thousands of years! Trade must enrich both parties, and if it does not, it's a highway robbery! The whole economic system of the world needs to be rewritten in a hurry! As per Forbes Magazine, the wealth of 3 richest people, today, "exceeds the gross national product of 48 poorest nations." That's a shame! Forbes has also been reporting, that "1.5 trillion, today, is in 500 hands"! Such disparities show, that unbridled greed has replaced the common sense and interests! We are reaping what we have been sowing - a rampant economic injustice in the world! We must stand up, and not let this happen!

Mr. Troubledgoodangel

For a Church fellow, you have some very good smarts, also, some highly excellent information source...

With the Chinese, it is simple formula of foreign domination using the weakness of over come of strength through application of strategy.

If once the American dollar is diminished through devaluation, then import products {from China} become more dear over time to the desired point of a trade imbalance becoming over bearing. Then to avoidance of a disaster, to throw out the life ring of obtaining through foreign banking credits, acquisition of real property as an exchange. Then, the dictation of further requirements that would be beneficial to Chinese interest and that of their partner, Russia.

For in the past as a silent formation, the coalition of Russ an and Chinese foreign and domestic interest has been on going.

The most apparent has arisen to surface in the energy field in the Gas and Oil production and distribution. It is a matter of now of consolidation of interest into a Russian/Chinese Monopoly in energy. For this has been accomplished to a large degree in Europe as an early stage of accomplishment.

The next phase of consultation is control. For the mechanism of this accomplishment was formed some time past through one of the Russian tools developed for this purpose with state controlled all arms exporter {Rosoboronexport}

www.roe.ru/


At present with the Myanmar unrest situation is a threat to Russian interest with Burma oil. For this is a prime energy target for Russian equation interest.

Charles

[Jaga]

It is getting worse with dollar. What is interesting - the foreign media, like Poland or GB talks about it much more than the American mass media, since the Americans do not want to cause a panic on the market. Soros, Greenspan and Warren Buffet all agree that a deep recession is coming.

here is more:
Dollar tumbles to all-time lows on China comments

NEW YORK (Reuters) - The dollar tumbled to record lows against the euro on Wednesday after comments by a Chinese official stoked fears the central bank of the world's fourth largest economy would reduce its holdings of U.S. assets.

investing.reuters.co.uk/news/articleinvesting.aspx?type=hotStocksNewsUS&storyID=2007-11-07T175825Z_01_KIM178807_RTRUKOC_0_US-MARKETS-FOREX.xml