China Threatens to crash US Dollars

China holds close to a Trillion dollars of our debt. This is the money Bush borrowed from China to fight his war in Iraq and to give the wealthy Americans tax breaks.

I've been warning my friends and family for several years now, that China, still a Comunist country, could use this debt to destroy our economy by calling in our debt and converting to euros. China has just threatened this very thing.

From the UK Telegraph:

China threatens to trigger US dollar crash
By Ambrose Evans-Pritchard
Last Updated: 1:41am BST 09/08/2007

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 Treasury bonds if Washington imposes trade sanctions to force a yuan revaluation.

Two Chinese officials at leading Communist Party bodies have given interviews in recent days warning, for the first time, that Beijing may use its $1,330bn (£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 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 more than $900bn in a mix of US bonds.

Xia Bin, finance chief at China's Development Research Centre (which has cabinet rank), kicked off what 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 said.

He Fan, an official at the Chinese Academy of Social Sciences, went further yesterday, letting it be known that Beijing had the power to set off a dollar collapse, if it chose 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," he told China Daily. "Russia, Switzerland and several other countries have reduced 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."

You can read more here.

This morning we get a response from Bush from the AP:

China dollar attack would be 'foolhardy' : Bush Thu Aug 9, 4:05 AM ET

President George W. Bush on Wednesday said China would be "foolhardy" to attempt to push down the dollar in retaliation for US pressure over Beijing's alleged currency manipulation.

Bush said he had not seen the report that Beijing was hinting at such a move, in Britain's Daily Telegraph newspaper, but warned against any attempt by China to hit back at Washington using vast foreign currency reserves.

"That would be foolhardy of them to do that," Bush said in an interview with Fox News, adding he doubted the report was based on sources from the office of Chinese President Hu Jintao.

"If that's the ... position of the government, it would be foolhardy for them to do this."

A researcher at a top government think tank said Thursday China will not sell off its US dollar assets as long as there is no major disagreement with the United States.

Zhang Ming, an economist with the top Chinese Academy of Social Sciences, made the remark after Bush's comments.

"As long as there are no big upheavals in the American economy and there is no serious dispute between China and the United States, the Chinese government will not sell off US dollar assets in any major amounts," Zhang told AFP.

He said that China would stand to lose, too, if the dollar plunged as a result because an estimated two thirds of its 1.3-trillion-dollar foreign exchange reserves are tied up in US-dollar assets, mostly Treasury bonds.

"Neither China nor the United States would rashly touch the yuan exchange rate," Zhang said.

US Treasury Secretary Henry Paulson meanwhile said on CNBC that suggestions that China was considering selling off dollar denominated assets to hammer the already weakened US dollar were "absurd."

"We have tensions and we have to deal with tensions on both sides ... but overall, both of our countries are committed to a constructive economic relationships," said Paulson, who returned from talks with top leaders in China last week.

China said on Friday it would not be pressured into currency reform as Washington and the US Congress renewed calls for it to speed up changes to make the yuan more market-oriented.

The Telegraph reported that two officials at leading Communist Party bodies had given interviews in recent days warning that Beijing might use more than a trillion dollars in foreign reserves as a political weapon in the event of US sanctions designed to punish Beijing for yuan manipulation.

Described as China's "nuclear option" in the state media, such a move could trigger a crash of the already-falling greenback and a spike in the US bond yields, which could then dampen the beleaguered housing market and put the world's richest economy into a recession.

When asked whether such an option would hurt China more than the United States, Bush said, "Absolutely. I think so."

China reportedly holds some 900 billion dollars in a mix of US bonds.

Granted, if China tried this, the whole world would suffer, however, this is still hanging over or head. Damage would be done to our economy if China sold even a small amount of our debt.

More Bush:

Bush said the United States and China could resolve their differences "in a cordial way" as opposed to the reported option by Beijing of liquidating its vast holdings of US dollars or through legislation by the US Congress imposing sanctions on China.

He cited a high level "strategic economic dialogue" chaired by Paulson and Chinese Vice-Premier Wu Yi as an effective channel to discuss differences between the two powers.

Bush said the two powers had "a very complex trading relationship" and that it was "very important" for the US economy to have access to the vast Chinese market.

Critics of China in the United States say the yuan currency is undervalued by as much as 40 percent, making Chinese exports cheaper.

Some blame the low currency value for the loss of US manufacturing jobs and a US trade deficit with China that hit 232.5 billion dollars last year, according to Washington's figures.

Bush said Chinese goods had been beneficial for US consumers as they had helped hold down inflation, particularly in the face of rising energy prices.