Business and Finance

China's nuclear option — dumping dollars

Last week The Daily Telegraph published an opinion piece titled China threatens 'nuclear option' of dollar sales by Ambrose Evans-Pritchard. It makes the following claim:

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.

According to Richard McGregor in The Financial Times, the story "was initially dismissed in China but prompted testy responses from US President George W. Bush and Hank Paulson, the US treasury secretary" (Link: China affirms dollar's global reserve status).

According to the FT article, the Harvard-educated Chinese economist whose views were quoted as government policy by Ambrose Evans-Pritchard says his views were misrepresented. The FT quotes several sources who pooh pooh the idea that China will dump its greenbacks.

Writing on, Andrew Leonard asks the question 'Will China Drop the bomb on the U.S. dollar?' His answer is no: He takes apart Evans-Pritchard's panic piece, and examines that writer's record of espousing conspiracy theories (The article is reproduced on Howard French's blog here).

The China Daily quotes an announcement by the People's Bank of China that 'the US dollar plays an important role in the global monetary system and dollar assets are an important part of China's foreign exchange reserve'. The article confidently predicts that the announcement "should scotch rumors that Beijing would sell off its US dollar reserve in response to Washington's pressure to revaluate the yuan."

Despite the fact that the recent rise in panicky thinking seems to have been triggered by a piece of sloppy journalism, such official statements from China are not going to reassure everyone. The U.S. website Counterpunch for example, has published a piece by Paul Craig Roberts, a former Wall Street Journal editor and Assistant Secretary of the Treasury in the Reagan administration. It's called China's Threat to the Dollar is Real, and it accuses anyone who does not agree of being "greatly mistaken".

Roberts disagrees with some clear-thinking people who see that it is in no one's interests for China to dump its dollars. But facts about a sell off are unlikely to stop the growing sense of unease in the U.S. about the exposure of the world's greatest economy to the central bank policy of its uppity new rival.

There are currently 5 Comments for China's nuclear option — dumping dollars.

Comments on China's nuclear option — dumping dollars

Ambrose Evans-Pritchard is to financial reporting as Charles Manson is to Gestalt theory; believing China will liquidate its US treasuries is akin to believing fathers secretly wish their daughters would kill the neighbours. However nice it sounds in theory, the reality is there's not much to be gained by either act. Unfortunately, like Manson, E-P will always rope in a few gullible day traders and Treasury types who never got beyond "The Star-Spangled Banner" in history or "Dick and Dora" in English. Happily, I'm cleaning up on the basis that this mug has got it wrong. E-P should come to me for investment advice rather than pulling his plonker in public.

In my understanding, horse-sense economics, I call it, why would a nation obsessed with economic growth trash the currency of its best customer? It doesn't make any sense.

It's even simpler than all that:

If China "liquidated" its vast holdings, the value of said holdings would fall faster than they could sell, meaning they'd get very poor value from the sale.

Basic economics.

China keeps raising rates, while the US is lowering rates. This imbalance could be creating a fundamental problem, and the effects could be quite...interesting.

China knows well itself and the adversaries. As long as China’s economy will increase, they will stay in the status quo, but when the china’s economy growth will level at 3 percent increase or so, then will be the time to be worried. Unfortunately this will happen one day, and they will have nothing to lose but to win ….
Keep well in mind that, not long ago they were communists, and still remember the saying:
The proletarians have nothing to lose but their chains. They have a world to win. ...

China Media Timeline
Major media events over the last three decades
Danwei Model Workers
The latest recommended blogs and new media
From 2008
Front Page of the Day
A different newspaper every weekday
From the Vault
Classic Danwei posts
+ Culture and corporate propaganda in Soho Xiaobao (2007.11): Mid-2007 issues of Soho Xiaobao (SOHO小报), illustrating the complicated identity of in-house magazines run by real estate companies.
+ Internet executives complain about excessive Net censorship (2010.03): Internet executives complain about excessive Net censorship at an officially sanctioned meeting in Shenzhen.
+ Crowd-sourced cheating on the 2010 gaokao (2010.06): A student in Sichuan seeks help with the ancient Chinese section of this year's college entrance exam -- while the test is going on!
Danwei Archives