Chinese government goes bezerk on the eve of subprime crisis

I got this as an email from a fellow trader:

China threatens 'nuclear option' of dollar sales
By Ambrose Evans-Pritchard

LastUpdated: 6:00pm BST 07/08/2007 (Telegrahp.co.uk)The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of UStreasuries if Washington imposes trade sanctions to force a yuan revaluation.Two officials at leading Communist Party bodies have given interviews in recentdays warning - for the first time - that Beijing may use its $1.33 trillion(GBP658bn) of foreign reserves as a political weapon to counter pressure from theUS Congress. Shifts in Chinese policy are often announced through key thinktanks and academies.Described as China's "nuclear option" in the state media, such action couldtrigger a dollar crash at a time when the US currency is already breaking downthrough historic support levels.It would also cause a spike in US bond yields, hammering the US housing marketand perhaps tipping the economy into recession. It is estimated that China holdsover $900bn in a mix of US bonds.Xia Bin, finance chief at the Development Research Centre (which has cabinetrank), kicked off what now appears to be government policy with a comment lastweek that Beijing's foreign reserves should be used as a "bargaining chip" intalks with the US."Of course, China doesn't want any undesirable phenomenon in the globalfinancial order," he added.He Fan, an official at the Chinese Academy of Social Sciences, went even furthertoday, letting it be known that Beijing had the power to set off a dollarcollapse if it choose to do so."China has accumulated a large sum of US dollars. Such a big sum, of which aconsiderable portion is in US treasury bonds, contributes a great deal tomaintaining 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 stableagainst the dollar. The Chinese central bank will be forced to sell dollars oncethe yuan appreciated dramatically, which might lead to a mass depreciation ofthe 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 "heldhostage to economic decicions being made in Beijing, Shanghai, or Tokyo".She said foreign control over 44pc of the US national debt had left Americaacutely vulnerable.Simon Derrick, a currency strategist at the Bank of New York Mellon, said thecomments were a message to the US Senate as Capitol Hill prepares legislationfor the Autumn session."The words are alarming and unambiguous. This carries a clear political threatand could have very serious consequences at a time when the credit markets arealready afraid of contagion from the subprime troubles," he said.A bill drafted by a group of US senators, and backed by the Senate FinanceCommittee, calls for trade tariffs against Chinese goods as retaliation foralleged currency manipulation.The yuan has appreciated 9pc against the dollar over the last two years under acrawling peg but it has failed to halt the rise of China's trade surplus, whichreached $26.9bn in June.Henry Paulson, the US Treasury Secretary, said any such sanctions wouldundermine American authority and "could trigger a global cycle of protectionistlegislation".Mr Paulson is a China expert from his days as head of Goldman Sachs. He hasopted for a softer form of diplomacy, but appeared to win few concession fromBeijing on a unscheduled trip to China last week aimed at calming the waters.