China threatens 'nuclear option' of dollar sales
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 treasuries if Washington imposes trade sanctions to force a yuan revaluation.
# Blog - Dollar to collapse?
Fistful of dollars - China threatens 'nuclear option' of dollar sales
Fistful of dollars - China's trade surplus reached $26.9bn in June
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.
Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now 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 added.
He Fan, an official at the Chinese Academy of Social Sciences, went even further today, letting it be known that Beijing had the power to set off a dollar collapse if it choose 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. 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 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," 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 "held hostage to economic decicions being made in Beijing, Shanghai, or Tokyo".
She said foreign control over 44pc of the US national debt had left America acutely vulnerable.
Simon Derrick, a currency strategist at the Bank of New York Mellon, said the comments were a message to the US Senate as Capitol Hill prepares legislation for the Autumn session.
"The words are alarming and unambiguous. This carries a clear political threat and could have very serious consequences at a time when the credit markets are already afraid of contagion from the subprime troubles," he said.
A bill drafted by a group of US senators, and backed by the Senate Finance Committee, calls for trade tariffs against Chinese goods as retaliation for alleged currency manipulation.
The yuan has appreciated 9pc against the dollar over the last two years under a crawling peg but it has failed to halt the rise of China's trade surplus, which reached $26.9bn in June.
Henry Paulson, the US Tresury Secretary, said any such sanctions would undermine American authority and "could trigger a global cycle of protectionist legislation".
Mr Paulson is a China expert from his days as head of Goldman Sachs. He has opted for a softer form of diplomacy, but appeared to win few concession from Beijing on a unscheduled trip to China last week aimed at calming the water
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina107a.xml
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And as a Result of the Greed to Privatize...
The greedy start to screw themselves; one slow step at a time.
Treasuries Fall the Most in More Than Month on Stocks, Auction
By Deborah Finestone and Sandra Hernandez
Aug. 8 (Bloomberg) -- Treasuries fell the most in more than a month as a rally in global stocks drew demand away from government debt after the Federal Reserve said yesterday the U.S. economy is likely to weather a housing slowdown.
A decline in 10-year notes pushed yields to the highest in almost two weeks after the government's auction of $13 billion in the securities today drew a higher yield than dealers expected. Trading in credit-default swaps showed the risk of owning corporate bonds dropped.
``The rally in the stock market is taking away demand for government debt,'' said Andy Richman, who oversees $10 billion in fixed-income assets as a strategist in West Palm Beach, Florida, for SunTrust Bank's personal asset-management division. ``People are taking money out of Treasuries and putting it into corporate debt as the economy is not going down the chute.''
The yield of the existing 10-year note rose almost 8 basis points, or 0.08 percentage point, to 4.86 percent at 4:15 p.m. in New York, according to bond broker Cantor Fitzgerald LP. It touched 4.89 percent, the highest since July 26. The price of the 4 1/2 percent security due in May 2017 fell 18/32, or $5.63 per $1,000 face amount, to 97 7/32.
Two-year note yields, which are more sensitive to changes in monetary policy than longer-maturity debt, rose 6 basis points to 4.64 percent as investors pared bets on a cut in borrowing costs.
The government's auction of 10-year notes drew a yield of 4.855 percent, higher than the average forecast of 4.841 percent from 11 bond-trading firms surveyed by Bloomberg News.
Indirect bidders, a class that includes foreign central banks, bought 32.1 percent of the auction. In the last eight new 10-year note auctions of the same amount, they bought 39.1 percent on average.
Auction Demand
For every $1 sold, there was $2.30 worth of bids, the same as for the last new auction of the notes. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered for sale, has averaged $2.35 in the last eight new 10-year note auctions.
Demand for government debt waned as stocks staged a recovery after the Fed's rate-setting committee said in a statement yesterday that job growth and a ``robust global economy'' may help the U.S. withstand losses in subprime mortgages.
U.S. stocks rose today a third straight day, with the Standard & Poor's 500 Index advancing 1.4 percent and the Dow Jones Industrial Average increasing 1.1 percent.
Credit-default swaps on the CDX North American Investment- Grade Index, a benchmark for the cost of protecting bonds against default, dropped as much as 9.25 basis points to 62.75 basis points, the lowest in more than a week. A decrease indicates improving perceptions of credit quality.
`Bit of Stabilization'
``We've seen a bit of stabilization that people were looking for in credit markets, which translates into an unwinding of the risk-aversion rally in Treasuries,'' said Joseph di Censo, fixed-income strategist in New York at Lehman Brothers Inc., one of 21 primary dealers required to bid on the auctions.
The Fed has kept its overnight rate for loans between banks at 5.25 percent since June 2006, when policy makers completed 17 quarter percentage point increases.
Trading on the November fed funds futures contract indicate traders see a 46 percent chance policy makers will lower the key rate to 5 percent in October, down from 84 percent on Aug. 6.
Economists forecast the 10-year note yield will rise to 4.96 percent this quarter and 5.01 percent by year-end, a Bloomberg News survey shows. The most recent forecasts are given the heaviest weightings.
Fannie Mae
Treasuries remained lower after U.S. Housing and Urban Development Secretary Alphonso Jackson said the government may raise the limit on purchases of home loans by Fannie Mae and Freddie Mac, the largest sources of money for home loans, in order to increase liquidity in the mortgage market.
President George W. Bush told reporters that his priority is ensuring that Fannie Mae and Freddie Mac complete their overhaul following $11.3 billion in accounting errors. Bush didn't reject the idea of raising the limits on how much the companies can buy.
Treasuries fell earlier on a report in the U.K.'s Daily Telegraph that China, the second-largest foreign holder of U.S. government debt with $407 billion, is prepared to sell its holdings in the event of U.S.-imposed trade sanctions. Japan owns $615 billion of Treasuries.
China suggested it will sell holdings of Treasuries should the U.S. impose trade sanctions to force a yuan revaluation, reported the Telegraph, citing He Fan, an official at the government-backed Chinese Academy of Social Sciences, and Xia Bin, director of the financial research department of the State Council, or cabinet. Calls by Bloomberg News to a press official at China's State Administration of Foreign Exchange weren't answered.
Treasury Secretary Henry Paulson said in an interview with CNBC that it would be ``absurd'' to think China would sell the bonds.
To contact the reporters on this story: Deborah Finestone in New York at dfinestone@bloomberg.net ; Sandra Hernandez in New York at shernandez4@bloomberg.net .
Last Updated: August 8, 2007 16:20 EDT |  |
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Weird Wally
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