China threatens 'nuclear option' of dollar sales

nmap · 08-07-2007, 21:28

Excerpt from the article:

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.

telegraph.uk link

A dangerous threat - and a credible one.

Isn't it interesting that China's growth depends on natural resources, as does our own. The potential for future confrontation seems to be growing - as is, perhaps, our vulnerability.

**The Reaper** · 08-07-2007, 21:33

But if our economy gets smacked, and people quit spending, their exports also suffer.

Do they have an alternate market for $50,000,000,000 of products per month, or the ability to cut back on production by 50%, or to warehouse it, with the Olympics coming up? I doubt it.

That would be cutting off their nose to spite their face. And right now, IMHO, their tainted products are already hurting their exports globally.

TR

Matta mile · 08-08-2007, 19:05

As usual TR you make a solid point. However, IMHO China seeks the "long game" of success and must somehow juggle lessening credibility/legitimacy with their changing population (middle class). China has routed most US manufacturing thereby reducing the options that US consumers have.

Case in point: textiles. It has been said 70% of everything you come in contact with is a textile. China has not only taken the finsihed good ie seat belts, clothes, tentage, furniture etc but has also taken the raw materials market away from the US.

As a commumnist country and with a heck of alot of US holdings, free bank loans to their manufacturers and Americans "voting" with their wallets I can't say that I am surprised that the current situation exists.

I personally am quite disappointed that we do as much business with China as we do. A communist country that has little concern for its people beyond governmental control.
Lets hope it does not come to military options. I would like to believe that in spite of the 10,000 cars they have recently sent to the US that our government realizes that the "most favored nation" is in fact a communist country and needs to clean up their act before we continue to open the flood gates of US distribution as I believe we will soon "be over a barrel" consumer wise.
I'd be interested in yours and anyone elses comments/scrutiny.
Thanks
MM

**The Reaper** · 08-08-2007, 19:35

I do not consider textiles to be an urgent necessity.

In fact, I probably could live the rest of my life with the clothes I have in my house without running out.

If I were hurting for money, I would not be out clothes shopping. If I did, it would be at an outlet or thrift shop.

If you want to know where all of these Chinese products came from, ask Bill, or better yet, Hillary what their roles were in this and what donations the Chinese gave them.

TR

Matta mile · 08-08-2007, 19:43

TR
Thanks for the response.
Sadly, it is very much beyond simply textiles. It has and is continuing to impact the technolgy and many other sectors.

MM

3SoldierDad · 08-08-2007, 20:44

Quote:

Originally Posted by nmap

Excerpt from the article:

[COLOR="Lime"]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.

Go ahead China push the button.

Problem is - We got each other by the throat....and no one is letting go. We're in this together. Move out of dollars? Okay, China, where you going to put it? In Euros? Yeah, right! Europe is one heck of bet for the future - NOT...It's supply and demand, baby - And, who's economy is the best on the planet right now? America, that's who...Maybe, it's a sad commentary on how screwed up our planet is when an average performing America is still the best.

3% growth in a $13 trillion dollar economy is still better than 10% in an economy a fraction of the size. My question is how sustainable is China's growth when you consider the looming problems on their horizon. If China, were a stock, I'd short it.

China has plenty of problems ahead. Growing at 10% a year when you start at nothing is easy. Hey, I made $20 dollars a week last year - Now I make $40 dollars a week - I'm growing my wages 100% year over year - Okay, that's fine, but so freak'n what! ...Their banks are chalk full of bad loans - nepotism is so thick that no one will write down their losses. The nanosecond China goes honest they go into a depression - That's how they'd really hurt us. The truth about China is that they can't handle the truth. The minute they come clean we all get dirty...Our economy is four times bigger with 1/4th the population. They've got a long way to go to catch Uncle Sam and there will be some huge bumps along China's way.

It may be imprudent to say so, but I'd call that bluff on their dumping the dollar. Threatening to hurt the only country that can help them climb out of their backward third world sesspool environment, doesn't sound like enlightened capitalism to me.

China is not a threat to us because they are so big and strong. China is a threat to us because they THINK they are so big and so strong. With all the little girls that get unborn over there - there's simply too much testosterone looking for a fight.

They'd better be careful or their nose is the one to be bloodied.

That's my $.02 cents.

Three Soldier Dad....Chuck

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**The Reaper** · 08-08-2007, 20:50

What do you think will happen when the people born in China since the "one child" policy started reach maturity and look for wives? They better have a new wave of gayness sweep the country.

Won't do much for future population increases though.

What will happen when there are close to a billion elderly, and "only" a few hundred million to support them?

You think the aging baby boomers are going to be a problem, the Chinese are only about 20 years behind us with five times the population.

TR

x-factor · 08-08-2007, 22:04

China needs us at least as much as we need them, probably more.

China is going to hit a wall eventually. I'm not sure when, I'm not sure how bad its going to be, and I'm not sure whats going to happen after, but its going to happen.

1) They're wrecking their environment as fast and hard as they can. I'm not just talking about not enough parks and greenspace. I'm talking about serious and massive health risks (for the rest of the world too). Their cancer rate is going to be off the charts. Just today the chairman of the Olympic committee said that they would likely have to postpone certain events for safety purposes on bad air days.

2) The export-led economy (or the Asian model) always runs out of steam. You can't keep building production capability, eventually you run out of market. US consumerism is not infinite.

3) The world (beginning with the US) is going to start holding them accountable to the "big boy" economic rules of First World nations: intellectual property, fair currency practices, etc.

4) Their demographics are a disaster. First, they've got a huge population thats going to have huge social welfare needs (see the first point about the environment) and, now that they've gotten a taste of prosperity, are going to expect more and more. Second, their growth rate and average age is about to implode because of the one child policy. How are they going to sustain their growth like this?

Interesting tidbit on comparative demographics: right now our population is about 1/4 of China's. I read somewhere that because of they're demographic time bomb and our population growth (combined reproduction and immigration) is steady and sustainable that by 2050 our population will be 1/2 as big as China's. (I probably fudged the stats there, but you get the idea.)

5) They're building a high energy consumption economy at a time when energy (and by that we mean oil) gets more and more scarce and expensive every day. What happens when they all start driving cars and using air conditioners?

6) The internal politics are a mess. You've got the inherent stress of an authoritarian system with its lack of political expression and religious repression. If it were just that I could let it go because Chinese culture and nationalismare so strong, but add to it the demographics issues and the HUGE gap between rich and poor in China (both on the individual level and the regional level with the Gold Coast vs the hinterlands)...its an implosion waiting to happen.

If you're betting on a new superpower, bet on India. They're doing it right by building an educational foundation, a diverse, sustainable economy, and a liberal pluralistic society. The same things that keep US in good hands will keep them steadily improving.

Matta mile · 08-09-2007, 10:21

What do you think about the rapidly growing consumer base that is within China itself? Enough to offset any damages that may occur between US China trade? I think this will be a very interesting one to follow. Thanks for bringing it in nmap.
MM

jatx · 08-09-2007, 10:37

Quote:

Originally Posted by Matta mile

What do you think about the rapidly growing consumer base that is within China itself? Enough to offset any damages that may occur between US China trade? I think this will be a very interesting one to follow. Thanks for bringing it in nmap.
MM

The Chinese consumer base is growing, but GDP per capita is still a fraction of the US and Europe, and consumers with Western levels of disposable income are a minuscule slice of the population. Most are still very, very poor. So although the growth rates are impressive in percentage terms, those consumers are not buying the same high margin products that are being exported to foreign consumers. Which is a long way of saying that they cannot replace exports with domestic sales without artificially stimulating demand, which they can't afford.

**The Reaper** · 08-09-2007, 10:40

They also will have a lot of unemployed citizens if they ruin the US economy, and unemployed people are not big spenders on commercial goods.

Well, except for the US and European unemployed.

TR

Matta mile · 08-09-2007, 10:55

Great points, but I still question the value of their growing middle class coupled with their intentions to produce and distribute automobiles world -wide. Production and sales of cars makes a big impact on most economies. GM and Chrysler all already there for alliance type efforts.
Thanks
MM

jatx · 08-09-2007, 11:03

MM, "middle class" is relative. They are more what we would term "workng poor", but with even less purchasing power.

**The Reaper** · 08-09-2007, 11:25

Quote:

Originally Posted by jatx

MM, "middle class" is relative. They are more what we would term "workng poor", but with even less purchasing power.

Exactly.

The average manufacturing wage in China is 65 cents per hour. Higher skills and senior workers may make as much as $1 per hour.

You are not going to suck up an additional $100B per year in consumer spending, even with millions of workers.

TR

smp52 · 08-09-2007, 12:23

Quote:

If you're betting on a new superpower, bet on India. They're doing it right by building an educational foundation, a diverse, sustainable economy, and a liberal pluralistic society. The same things that keep US in good hands will keep them steadily improving.

I wouldn't bet on anyone becoming a 'superpower' anymore. It's simply too costly to do so. Sure, India will probably have better long term growth potential that is far more manageable, but a superpower on the level of the USA, I think not. They have a long way to go. This in no way implies it won't hold strong economic influence, but there is still a difference between a superpower economy built on solid infrastructure (energy, roads, education, military reach). India doesn't have near the necessary resources for its population (nor does China). We don't either, right now, BUT when we needed local resources during our ascent, we had it all. Now that we're at the top, we're simply sustaining it. Maybe if India or China had say, North American natural resources, it would really help them out.