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Thread: China threatens 'nuclear option' against US economy ...

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    Banned Melonie's Avatar
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    Default China threatens 'nuclear option' against US economy ...

    (snip)"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.
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    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"."(snip)

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    Default Re: China threatens 'nuclear option' against US economy ...

    Hopefully this will convince our government to start acting responsibly and to stop running up trillions of dollars of debt.

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    Featured Member Vamp's Avatar
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    Default Re: China threatens 'nuclear option' against US economy ...

    Well I have tried to stay hopeful. But with all these differant factors ....

    Get ready for the next Great Depression!
    Nature knows no indecencies; man invents them. ~ Mark Twain


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    God/dess Zofia's Avatar
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    Default Re: China threatens 'nuclear option' against US economy ...

    China does not want to see the value of the Yuan change relative to the Dollar. They see the US as trying to force that. But, they are threatening to do just what we want, let the Yuan rise against the Dollar. So, if they want to sell US Dollars, go right ahead. That will, presumably, cause the dollar to fall and the Yuan to rise. Leading to fewer exports from China to the US or more exports from the US to China.

    However, there is a contrary argument and that is one that has held sway in Beijing for years. That argument is, China is one Dollar sale away from a currency meltdown like that which swept through the region just ten years ago. If that position is right, Dollar sales by China will lead to the Yuan's collapse and perhaps a general uprising by China's middle and working classes. China has generally made sure that it had great foreign reserves to reassure foreigners that the Yuan was stable, backed by Dollars, Euros, Yen and Pounds Sterling. We will not know unless the Chinese decide to sell off Dollars. If that happens, it will be a wild ride for smeone. But, the world's largest economy is not likely to be hurt as much as any one elses.

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    Banned Melonie's Avatar
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    Default Re: China threatens 'nuclear option' against US economy ...

    ^^^ Zofia, your contrary position goes back to a 'lingering' issue about chinese banks ... that they supposedly are holding incredibly high amounts of delinquent (or non-performing) corporate debt, a situation which is being swept under the rug by the Chinese gov't. The conspiracy theorists would have us believe that gov't forebearance of bad loans to Chinese corporations is yet another way in which Chinese corporations are gov't subsidized thus able to undersell the rest of the world.

    If even semi-accurate info about the true financial situations of Chinese banks and Chinese corporations were to be scrutinized by the ratings agencies in the same manner that they have focused new attention towards US banks, foreign investors might think twice and run for the exits. Thus while China has the power to crash the US dollar, arguably China's stock market is equally vulnerable to such a crash. Massive foreign debts and massive foreign capital are two sides of the same coin.

    However, the two sides of the same coin theory also leads to an inevitable conclusion that if one major component of our new globalized interdependent economy takes a serious hit, the domino effect will quickly follow ... with nobody left unscathed. And to complicate matters even further, as shown by the current US subprime -> US Alt-A -> CDO's -> hedge funds -> foreign banks progression, these days nobody really has a good handle on what sort of interdependent financial relationships already exist ... let alone having a handle on what amounts of money are involved !

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    Default Re: China threatens 'nuclear option' against US economy ...

    If I were President, my response to China:

    Go ahead, make my day!

    This threat from China should be a wake-up call for the U.S., but we have traitors and cowards in the White House and in Congress who will sell us out.

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    Default Re: China threatens 'nuclear option' against US economy ...

    Quote Originally Posted by Melonie View Post
    ^^^ Zofia, your contrary position goes back to a 'lingering' issue about chinese banks ... that they supposedly are holding incredibly high amounts of delinquent (or non-performing) corporate debt...
    I wish you had read my post. But, thanks for your non-responsive reply.

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    Default Re: China threatens 'nuclear option' against US economy ...

    there is a contrary argument ............ If that position is right, Dollar sales by China will lead to the Yuan's collapse and perhaps a general uprising by China's middle and working classes. China has generally made sure that it had great foreign reserves to reassure foreigners that the Yuan was stable, backed by Dollars, Euros, Yen and Pounds Sterling. We will not know unless the Chinese decide to sell off Dollars. If that happens, it will be a wild ride for someone
    Zofia, your contrary position goes back to a 'lingering' issue about chinese banks ... that they supposedly are holding incredibly high amounts of delinquent (or non-performing) corporate debt
    But, thanks for your non-responsive reply
    how was my reply unresponsive ? You made the contrary argument that the stability of the Yuan (and therefore of the Chinese economy in general) is the object of suspicion by foreign investors. Thus China holding massive amounts of reserves in various foreign currencies was a de-facto pre-requisite to continued foreign investment, and the possible Chinese sell-off of massive amounts of dollar reserves could serve to spook those foreign investors thus torching the Yuan. I added to this that the reputed stability of Chinese banks is not all that great due to their gov't sanctioned holding of non-performing Chinese corporate loans, and that this could further spook those foreign investors thus torching the Yuan even worse if foreign dis-investment momentum were to ever get started. After all, from a skeptical viewpoint, Chinese bank exposure to bad corporate loans is no different in risk than US and Western European bank exposure to bad subprime RE bonds and CDO's ... other than the facts that the Chinese bank exposure has received scant publicity, and that Chinese Gov't bank regulators have not forced Chinese banks to 'mark to market' on the bad loans they are holding. It may turn out that every Yuan's worth of Chinese foreign currency reserves is already offset by a Yuan's worth of bad Chinese bank loan holdings - who the hell really knows, and the Chinese aren't talking (or publishing credible financial reports).


    While we're back on the subject, what are your thoughts as to the 'pure coincidence' of China's 'nuclear option' threat being publicized last wednesday, being immediately followed by all sorts of financial turmoil in the US and Western European banking systems on thursday and friday ?

    ~
    Last edited by Melonie; 08-11-2007 at 09:01 AM.

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    Default Re: China threatens 'nuclear option' against US economy ...

    Quote Originally Posted by Melonie View Post
    While we're back on the subject, what are your thoughts as to the 'pure coincidence' of China's 'nuclear option' threat being publicized last wednesday, being immediately followed by all sorts of financial turmoil in the US and Western European banking systems on thursday and friday ?
    i thought that was coincidence actually. i mean the sub-prime and "regular" mortgages issue has been bouncing around for a while. i remember a conversation of this back in march with a broker, with her detailing the tightening market and fallout/collapses (firsthand). i think it had MUCH more to do with the French thing.

    the chinese holding reserves has always been bandied about. heck, i remember taiwan, japan, and even south korea using that ploy back in the mid-90's. true, it wasn't the gargantuan numbers we're talking about with china and they weren't using it in an offensive way (more as a show of solidarity/support from allies). but the basic concept and tool has been around forever.

    would they employ it? trouble is you need to see it from their pov. tanking the yuan IS a possible option if they have no other. no doubt, china and the us are integral to each other nowadays, supplier/client. but politics are more important than money in china. don't get me wrong, they're more capitalistic than we are imho (ironically). but they'll much more willing to take a huge tactical loss for a strategic gain.

    they don't have to deal too much with periodic changes (2-years/4-years/8-years). they have the ability to stay a course for a much longer period of time than we do.

    all in all, i DO think it is a possible option they may employ. not a first-choice obviously. i really don't think it will be used though (at least overtly).

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    Default Re: China threatens 'nuclear option' against US economy ...

    That argument is, China is one Dollar sale away from a currency meltdown like that which swept through the region just ten years ago. If that position is right, Dollar sales by China will lead to the Yuan's collapse and perhaps a general uprising by China's middle and working classes. China has generally made sure that it had great foreign reserves to reassure foreigners that the Yuan was stable, backed by Dollars, Euros, Yen and Pounds Sterling. We will not know unless the Chinese decide to sell off Dollars. If that happens, it will be a wild ride for smeone. But, the world's largest economy is not likely to be hurt as much as any one elses.
    I tend to concur on all points. There is no transparency in the Chinese market, so we're all speculating, but I see no reason why this isn't completely plausible.
    Idealism is fine, but as it approaches reality, the costs become prohibitive.

    William F. Buckley, Jr.

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    Default Re: China threatens 'nuclear option' against US economy ...

    AP
    China Seeks to Dampen US Dollar Rumors
    Sunday August 12, 3:10 am ET
    China's Central Bank Says US Dollars Are Important Part of Reserves, State Media Reports


    BEIJING (AP) -- China sought Sunday to dampen speculation it will conduct a massive sell-off of U.S. dollar holdings, with a central bank official saying the dollar remains a mainstay of its foreign exchange reserves.
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    In an interview carried by the government's Xinhua News Agency, an unnamed official with the People's Bank of China said U.S. dollars and government bonds are "an important part of China's foreign reserve investments."

    China's $1.3 trillion in foreign exchange reserves are the largest in the world and are believed to be comprised largely of dollar assets, potentially giving Beijing enormous sway over the dollar's value and currency markets worldwide.

    A report in the British newspaper The Daily Telegraph this past week that quoted Chinese government economists as saying China would dump its dollar holdings in the event of a trade war with Washington added to jitters in stock markets already unnerved by volatility in U.S. share markets.

    Xinhua said the central banker's remarks were intended to counter unspecified reports in Western media that China "is threatening to carry out a sell-off of U.S. dollars."

    The Xinhua report was prominently posted on the central government's main Web site, in a further sign Beijing hoped the statement would underscore its commitment to hold U.S. dollar assets and calm investors.

    "China is a responsible investor in international financial markets, and our country's foreign exchange reserves are managed with the operational goals of safety, liquidity and profit," Xinhua quoted the central bank official as saying.

    The People's Bank does not disclose the composition of the foreign exchange reserves, which have swelled in recent years as China's exports surged and investors poured money into the country to profit from an economy now in its fourth straight year of double-digit growth.

    But the reserves have become a political issue both within China and between Beijing and Washington. As the dollar has fallen in value, the People's Bank has come under pressure to diversify its holdings to maintain the value of the reserves and improve returns.

    Washington has pointed to China's growing reserves as proof that the Chinese currency is undervalued, making Chinese exports cheap, putting American manufacturers at a disadvantage and compounding a hefty U.S. trade deficit. Several U.S. senators have renewed calls in recent weeks to punish Beijing if it does not let the currency, the yuan, rise in value.
    Nature knows no indecencies; man invents them. ~ Mark Twain


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    Default Re: China threatens 'nuclear option' against US economy ...

    It would be so bad for China to dump dollars!

    I mean, what would we do - raise taxes? Dip into our negative savings rate? Fully utilize our non-factories popping the bird towards China? In the wake of globalism, the rules of currency speculation have changed.

    Destroying the dollar and making deals with Russian and the middle east for oil sounds like a good way to corner the energy market.

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    Default Re: China threatens 'nuclear option' against US economy ...

    ^^^ actually, if the Chinese WERE to dump dollars, the resulting immediate 'inflation' of US dollar denominated prices of imported items ( which today means just about everything ) would set off a huge round of wage and price increases. Thanks to our progressive tax system, this would automatically set off a huge tax increase without anybody in Washington DC having to vote on it !!!

    Unfortunately, there are two groups that would 'apparently' benefit from a declining dollar. The first is Americans who owe more money than they are worth, because their paychecks would inflate in dollar terms (but not in purchasing power) while their monthly debt payments would stay the same in dollar terms. The second is US corporations (in name, anyhow), whose profits on overseas operations which are denominated in other currencies would now convert into higher profits in US dollar terms.


    "China is a responsible investor in international financial markets, and our country's foreign exchange reserves are managed with the operational goals of safety, liquidity and profit," Xinhua quoted the central bank official as saying.
    Yeah right I believe this Chinese Central Bank apparatchik exactly as much as I believe Ben Bernakke ! Forgive me for putting the tin foil hat on again, but there is simply TOO much coincidence involved between the Chinese Central Bank's 'nuclear option' statement occurring last wednesday, all hell breaking loose in the world financial markets last thursday and friday, and this statement of 'reassurance' being issued today. Skeptics would tell you that last thursday and friday's events were a deliberate 'shot across the bow' on the part of the Chinese to let the Western world's protectionist politicians know exactly what they are f^%king with in proposing Chinese tariffs, quotas etc.

    Ultimately, I suspect that the golden rule will apply i.e. 'he who has the gold makes the rules' !!! I also suspect that, financially speaking, this is going to get very ugly very soon. Remember that China has been slowly but steadily buying an interest in various hedge funds (i.e. Blackstone) and western banks (i.e. Barclays), thus is perfectly positioned to throw a trillion dollar monkey wrench into the Western world's financial system any time they choose.



    ~
    Last edited by Melonie; 08-12-2007 at 11:48 PM.

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