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China’s Currency Threat
Posted by: Jon Henke on Wednesday, August 08, 2007

The Telegraph reports that China is floating a threat...
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.
Either China needs better economists, or China's economists are suicidal. We might certainly find it uncomfortable if the Chinese government were to do this, but China will get soaked.

Granted, if China floods the market with US dollars, the dollar will decline in relative value and that would cause some problems for the US for a time. But at what cost to China? Sure, they might create a minor economic problem for the US, but they would create two massive problems for China...

  1. A massive sell-off of US securities will push down the value of those securities, leaving China with a massive potential value loss on their currency/security holdings.


  2. China's economy is unusually dependent on exports. They do so well with exports, in part, because it's so cheap to buy from them. If the US dollar declines, Chinese exports become more expensive for us. If our currency declines significantly, it will either depress our demand for those export goods or shift it to other countries. (not to mention the unpredictable potential political reaction against China) China doesn't have the economic diversity or sociopolitical stability to take that kind of hit to their export-driven economy very easily.

The confusing thing is this: China's economists and leaders surely know this. So why are they making the economic eqiuvalent of threatening to bleed on our carpet...by cutting off their arm?
 
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In the long run, if China were to follow through on this threat, it would probably be beneficial for the US and China, though when I say beneficial for China, I mean for the population, not the Communist government who would finally succumb to a popular uprising and be replaced with a more rational democratic capitalist government... which is precisely why it would be good for China.

So the only people hurt if this threat were realized, would be those making the threat.

Brilliant!

Cap
 
Written By: Captin Sarcastic
URL: http://
Hmm. A couple of other points to ponder.

The effect on the debt markets ad the Chinese sell off their bond holdings would be to drive prices down, and yields up. This would, in effect, raise the price of money, i.e., interest rates. Of course, for the Chinese, such sales would mean that they were selling their holdings at a discount, but would the rise in yields slow US growth signifigantly?

A decline in the dollar’s value in the FOREX, on the other hand, would make US Exports far more competitive in Canada, Mexico, and Europe, our largest trading partners.

Oh, and let’s not forget, the renminbi—or yuan, whatever you prefer—isn’t...uh, what’s a nice way of saying it?...perfectly convertible in the FOREX markets. This gets a bit tricky here, because the FOREX doesn’t simply fix values based on the supply of a particular currency floating around on a given day (although, for mature, industrial economies, it basically does work that way). The FOREX also has to consider the financial, political, and inflationary risks that make dealing with developing economies so...challenging. When you’re dealing with third-world currencies, the traders can simply declare "all bets are off" pretty darn quickly, in a way that’s fundamentally different than dealing with industrialized countries’ currencies, and that’s not always rational, as the Asian currency crisis os the early 90s shows.

On top of that, what do the Commies do once they’ve repatriated all that money?

In any case, I’ve touched on this in the past.
 
Written By: Dale Franks
URL: http://www.qando.net
The confusing thing is this: China’s economists and leaders surely know this. So why are they making the economic eqiuvalent of threatening to bleed on our carpet...by cutting off their arm?

Politics, same reason America is threatening to impose trade sanctions on cheap Chinese retail goods to make China strengthen the yuan - it looks good to talk tough. America threatens sanctions and China threatens to comply with the intent of the sanctions.
 
Written By: unaha-closp
URL: http://warisforwinning.blogspot.com/
Good points, all.

Here’s another question: who is the intended audience for this threat?

Policy-makers have sophisticated enough advisers - i.e. people who have taken basic economic courses - that they should be able to see through this.

The public is generally not sophisticated to see through this...but does China really want to make the US public angry at China? That seems like a recipe for trade, currency and political problems for China.

Or is there a third target? I can’t tell who it might be, but it’s hard to see the value of the first two.

 
Written By: Jon Henke
URL: http://QandO.net
Jon:

I enjoyed the post. I had posted on the Daily Telegraph piece and then did a second post on the topic mentioning your post. I agree that this may be a pre-emptive strike on the part of China, but I think they may be seriously misreading the political mood now here in the US.
 
Written By: Kurt Brouwer
URL: http://www.fundmasteryblog.com
China is pointing out real vulnerabilities in the American economy — we could not bounce back quickly if China dumped currency or sold off portfolio assets. Of course, it is absolutely true that China’s vulnerabilities are as great if not greater, and these actions would hurt China. What we’re seeing is a kind of economic brinksmanship. The costs of an "economic war" would be irrational for each, but each country hopes to push the other to policies best for itself. That’s one reason why Clinton and Bush both talked tough about China before being elected, but then ultimately pursued policies to preserve the economic relationship. At some point China will diversify its markets, slowly shift its currency holdings (decrease the percentage of dollars), and diversify its global equity holdings. As the middle class grows, China will shift (if they pursue economically rational policies) from a focus on intense export led growth to more internal market growth — Chinese workers will start producing more for their Chinese people rather than Americans. This will yield an increase in goods from China sold in the US, but if done right, at a rate that won’t jolt either economy.

The big uncertainty in all of this: global economic conditions and oil.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
Jon. I think this threat is certainly for the general public of the US, but not the way you think.

Who will likely press this announcement? Democrats.

Why?

"Look how poorly Bush is doing. Even china is threatening us. They’ll ruin our economy"

And because just about the only people that understand that by following through China hurts themselves FAR worse are the economists, the general public will believe it.

Because people are stupid.

People like Erb, who thinks China’s got us by the short and curlies...
 
Written By: Scott Jacobs
URL: http://

People like Erb, who thinks China’s got us by the short and curlies...
You mean like this: Of course, it is absolutely true that China’s vulnerabilities are as great if not greater, and these actions would hurt China. You’re just making stuff up Scott...your last name isn’t really Beauchamp, is it? ;-)
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
What happened when 300% anti-dumping duties hit Chinese made Bedroom furniture? Every buyer in America got on a plane and flew to Vietnam. Guess what? They could make that furniture for us instead of China. Nowadays, it’s easy to e-mail over your CAD files and start production the next day.

And for larger industries, they have been doing the China Plus One strategy just for these reasons, too. They are already semi-prepared.

I think it would affect certain industries more harshly, like toys or electronics, but would simply rise in price until alternative suppliers would spring up.

The good news for the Chinese would be that imported products would become cheaper , LOL.

Meanwhile China actually owns only very small portion of our T-Bills.
 
Written By: Harun
URL: http://
Or is there a third target? I can’t tell who it might be, but it’s hard to see the value of the first two.
How about 1.3 billion Chinese who are going to love to hear their own He Fan putting the Americans in their place?
 
Written By: unaha-closp
URL: http://
I dunno Unaha... I don’t think the ones building our stuff would want our economy hurt...
 
Written By: Scott Jacobs
URL: http://

 
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