“Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by "a network of small complicated rules" might degrade. Soft despotism is different from despotism (also called 'hard despotism') in the sense that it is not obvious to the people."

Tuesday, August 07, 2007

Thinking the Unthinkable. China and the US Dollar.

“The US dollar is no longer a stable anchor in the global financial system, nor is it likely to become one, therefore it is time to look for alternatives.”-Fan Gang, People’s Bank of China’s policy committee.

China threatens 'nuclear option' of dollar sales
By Ambrose Evans-Pritchard Telegraph
Last Updated: 6:00pm BST 07/08/2007

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.


  1. Why sure, the Chicoms call the markers due.

    Who really thought they were our friends?

    But the Boners that have hughly profited.

    Fighting an Iraqii civil war, on money borrowed from China. Then the Chinese put the double dip on US housing, through an interest rate hike, when the start their run.

    The Chicoms are not like normal bankers. They lost millions of lives fighting US in Korea, money is easier lost than lives, in a one-child China.

    But the Chicoms will play the margins, make headway regardless, as not all profits or losses are monetary.

  2. Dear china,

    Please notice I don't use a capital when speaking of your country. Your over extended empire is due for a break up soon and I hope your dumping of the US dollar starts the process.

    Please be aware that your own funds are at risk, a lesson the japanese learned during ronald and his ON purpose de-valuation of the dollar (fond memories and laughs on that on) and more importantly a devalued dollar strengthens USA exports and decreases IMPORTS from where? you guessed it... china....

    so, please make your good more expensive, trigger a recession in the usa and get americans to boycott chinese goods... I hear you can get cheap silverware and under ware from sinagapore & others...

    dear china, please focus on the 75,000 riots, the polution, the rising cancer and & aids rates....

    I predict the lion that you are is about to become a pussy when faced with the russian bear, the japanese, vietnam and all the others you trample on...

    Please enjoy the 1 million refugees a year sneeking into your belly from N Korea, bring with them all kinds of social ills...

    china, becareful of the tail of the usa your about to pull....

    have a nice day

    free tawian, tibet, mongolia...

  3. I don't really know how much this stuff means beyond that current trading patterns can't go on forever.

    There's something I read once about donald trump when he was in deep debt in the early 90's. something that was attributed to him was that if you oww a bunch to the bank then the bank owns you. but if you owe incredible amounts to the bank then you own the bank.

    the USA actually wants the Chinese to revalue the Yuan upwards faster than they are doing so as to make US exports more competitive. for their par t the chinese want to keep the yuan down so as to keep their exports high--which means its to their advantage to keep buying US treasuries.

    it may be that they were responding to the noise that hillary was making.

  4. Just some noise making from our Chinese Chums.

    We managed to reach as state of MAD with our economies.

    They're playing it up for the home team as much as Frau Clinton is here.

  5. China,

    The wall it seems, contrary to the usual presentation, is more about keeping the servants in than keeping the new landlords out. And more and more peoples are beginning to perceive it that way, China.

  6. It is funny you should mention Donald Trump - I saw him on TV weeks ago wailing on about how the fed needs to lower interest rates. I'm guessing he's already feeling the pinch of his high debt load and is squirming for relief. If China should start increasing it's sale of US dollars thus depressing the currency the Fed will probably have to defend the currency by upping interest rates in order to keep the devaluation of the dollar orderly. If not then a rapid increase in fall of gthe value of the US dollar could wreak havoc on the US economy. We are in a bad spot - yet another example of the Bush admin's bungling. Funny how Cedarford was railing on about this ages ago...

  7. Not that funny, ash.
    Not that funny at all.

  8. If there's a change in perception regards China as business partner, it's all over for China. Their banking industry and whole economy goes kaput.

  9. Not a chance in the world. Not even a teensy-weensy, itty bitty one.

  10. Ash said...

    It is funny you should mention Donald Trump - I saw him on TV weeks ago wailing on about how the fed needs to lower interest rates.
    the set up is very similiar to 1987. The economy was stalling and the fed couldn't lower interest rates because the dollar was falling overseas.