MercoPress. South Atlantic News Agency

Yuan clash: China threatens with massive sale of US bonds

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.

US President George Bush described the threat as "senseless" and Treasury Secretary Henry Paulson said "we have to handle tensions on both sides, but overall our two countries are committed to constructive economic relations". Two Chinese officials at leading Communist Party bodies have given interviews in recent days warning, for the first time, that Beijing may use its 1.3 trillion US dollars 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 900 billion US dollars in a mix of US bonds. Xia Bin, Finance Chief at China's Development Research Centre kicked off what appears to be a 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, said 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 said. "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, he said. The threats play into the presidential electoral campaign of Hillary Clinton, who has called for restrictive legislation to prevent the US being "held hostage to economic decisions being made in Beijing, Shanghai or Tokyo". She said foreign control over 44% of the US national debt had left America acutely vulnerable. 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 9% 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 26.9 billion US dollars in June. Henry Paulson, the US Treasury Secretary, said any such sanctions would undermine US authority and could trigger a global cycle of protectionist legislation. With a low priced Yuan China has a competitive edge in the US market, flooded with goods "Made in China" and an annual trade deficit of 232 billion US dollars. A devalued Yuan also helps attract US companies to invest and produce in China