The collapse begins?

China may leverage possibility of dollar selloff to spin US economy into recession to gain trading concessions.

This could quickly become a larger issue than the Iraq war in the national news and political debates. I wonder what effect this will have on the markets tomorrow…

There is also, it may seem, a rather cynical perspective here. If China really does feel strong enough to bear the fallout on it’s own economy by this move, pushing the US over the edge before the Iraq war ends would be a nice way of ruining a competing superpower… To a certain extent, this option has probably already been explored in Chinese political circles as the de facto option, and the only question being when rather than if, but it’s hard to tell. It would not suprise me.

I was under the impression that China owns so much US debt that they’d be cutting off their nose to spite their face if they do anything to fuck with our economy.

This really doesn’t make any sense. They don’t want to devalue the yuan so that they can continue to export to the US. But if they crash the US economy who’s going to buy their stuff?

There’s no question the Chinese would lose a lot of money if they ever decided to dump their US debt. But there’s more than just currency reserves at stake. If China wants to legitimately be viewed as a world superpower, they’re eventually going to have to do something to shift the balance of power away from the US. Dumping the dollar when the US is in a precarious position, both militarily and economically, might open things up enough for China to step in as a stronger asian, and eventually global, hegemony.

It’s also worth noting that the Chinese aren’t throwing this around as a first strike option. All their statements to this point contain the disclaimer “should the Yuan radically appreciate in value…” They’re not saying they WANT to dump the dollar, but the are clearly implying that if the US tries to muscle in on their monetary policy, they’re not without some pretty serious retaliatory options.

The only thing that makes this an arguably imminent threat is that conditions right now are pretty perfectly aligned for the PRC to leverage their currency reserves to maximum effect. If they wait 2 years or 5 years or longer, the US could get out of Iraq, the housing bubble fallout could pass, and the dollar could recover. If they don’t pull the trigger, the Chinese could wind up holding an economic weapon of considerably less value.

That said, they could also just go right along accumulating US debt for the foreseeable future. If they wind up holding enough of the US economy under their heel, they can crush it like a bug at their leisure. Or they can just work the economics to their advantage in perpetuity and get really rich. Just depends on what the priorities of the Chinese Communist Party leadership are.

Sidenote – I’m not trying to blow the “China = TEH SCARY!” alarm or anything. They’ve been firmly introduced to global capitalism, and now they’re just playing to win, IMHO.

Well the other side of the coin is the American political reaction. Chinese officials overtly threatening US trade policy and economic health with what could amount to a “Mexican standoff” will not go over well. If the threat is implied or indirect it’s a different perception. And just because it would seem to go against Chinese interests doesn’t mean China will react completely rationally. They may also be testing the waters to see how far they can push things, and may back down if things come to a head.

Again, i’m curious if this story has circulated or not, or if this is being confirmed elsewhere, and if so, what the markets’ reaction will be tomorrow to it if this new item is legitimate.

It’ll be interesting to see. If I had to bet, I’d guess that the market won’t price in the risk just yet.

There’s only one statement quoted from a cabinet level Chinese official, and his statements don’t go beyond the “it’s a potential bargaining chip” level of rhetoric. All the really inflamatory stuff is coming from a lower level administrator at the Chinese Academy of Social Sciences. Somebody with a more impressive title would have to be threatening economic war for it to get really crazy.

In any case – I hadn’t seen the story till I poked in here. Thanks for posting the link.

And now China has the US by the balls.

If the US tries to remedy its trade deficit, China hamstrings the US.

If the US continues as it is, China guts the American economy.

For once, I’m glad I don’t have any money. That’s just that much more to lose*. Wooo! Go China. I for one welcome our new overlords. =P

*Yes, Yes. I know. The US economy going down the toilet will have all sorts of ill effects that even poor people will feel, probably worse than rich people. But it’s not like there’s a lot of people looking out for us anyway. Heh.

China (along with quite a few other countries) will have to, at some point, stop buying US assets to maintain their low currencies. Why? Because the more they buy US assets the more devalued those assets become, so they have to keep on buying at ever larger amounts to maintain their pegs.
Since China has only a limited supply of money, they will be forced to stop at some point. Also note that the longer they take to stop the reserve accumulation the worse the more radical the economic adjustment will be.

The perfect way out of this situation would be for USG to stop being in deficit, and for China (and the others) to stop trying to peg to the USD.

But neither side wants to do any of the above, and IMHO China (and others) are not anymore to blame for this situation than the USG is.

It should also be noted that this situation is hurting China far more than it will the USG. China now has nearly 1 trillion dollars of investments with low amounts of return, which it could have alternately spent on much better returning internal investments (or indeed, returned to the chinese public sector in the form of lowered taxes).

The Chinese don’t need to liquidate all of their US $$$ holdings to enforce their point; selling off 10% or 15% and converting them to Euros would have a major impact on the US political situation.

I believe the rumblings are more to force large multi-nationals with a US stake to start pressuring the politicians to STFU with the campaign rhetoric. For example, Wal-Mart stands to lose big if this confrontation goes wrong; most of the goods they sell in the US come from China, bought with US dollars. Short term economic slow-down in the US, coupled with a rapid rise in the cost of goods purchased from China due to the rising exchange rate, could absolutely kill them. The exchange rate today is about $1=7.57 yuan; can you imagine the profit loss if that became $1=4 yuan in a short period of time, as the US Treasury Dept says it should be?

Which is why I believe the tough talk coming from US politicians is just campaign rhetoric with no intent to cause actual change.

Exactly, this is a tarbaby situation we gots heah…