This is a good thing, that foreign governments stand up against protectionist lobby groups in the United States. American congressmen, e.g. Senator Schumer (D-NY), have started to pander strongly to declining industries (e.g. those infected with the tapeworm of unionism). They accuse China of dishonesty with its fixed exchange rate. This claim about an undervalued exchange rate, and the demand it be changed, is a new form of financial protectionism. If China did it, American goods in China would be cheaper and Chinese goods sold in the United States would be more expensive – just like a tariff would do.
The Chinese government has replied, forcefully. It can use the “threat” of dumping dollar asset Treasury bonds, affecting the exchange rate of the U.S. dollar as well as U.S. domestic interest rates, to forestall this stupid congressional advocacy. Such an action by China would possibly hurt them more than it would hurt the American economy, but it would hurt the American economy. It shows the cost of this American protectionism; those like Schumer only only say it would help “us” (see my essay, “What Do You Mean ‘Us,’ Mr. President?).
I say, “Good for Chinese blowback.” It is in the best interests of the American people. It is too bad the American congress is on the wrong side of the issue, thanks to lobbying by that special interest (the tapeworm).
Which is worse?
(i) U.S. feudal labor unionist protectionism, or
(ii) Chinese manipulated market policies?
I think the Chinese represent my interests, producing and selling cheap goods in America, against the craven special-privilege seeking of labor union leaders In America, at the expense of all the rest of us.
China Threatens ‘Nuclear Option’ of Dollar Sales
by Ambrose Evans-Pritchard
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 U.S. currency is already breaking down through historic support levels.
It would also cause a spike in U.S. bond yields, hammering the U.S. housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900 billion in a mix of U.S. 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 U.S.
“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 U.S. dollars. Such a big sum, of which a considerable portion is in U.S. 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 amount of 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 decisions being made in Beijing, Shanghai, or Tokyo.”
She said foreign control over 44 percent of the U.S. 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 U.S. 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 U.S. senators, and backed by the Senate Finance Committee, calls for trade tariffs against Chinese goods as retaliation for alleged currency manipulation.
The [RMB] yuan has appreciated 9 percent against the [U.S.] 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 $26.9 billion in June.
Henry Paulson, the U.S. 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.
Last Updated: 1:41am BST August 9, 2007