Chinese Official Spooks Currency Market over US Bond Comment

Chinese investors, and that includes the Communist regime in Beijing, hold huge amounts of US government bonds. The Chinese willingness to subsidize America’s spendthrift government runs to the hundreds of billions. However, these bonds are assets of declining value long-term. Cheng Siwei, a vice chief of China’s National People’s Congress, cut half a cent off the value of the dollar with a simple sentence. That is the kind of power a creditor nation has.

Mr. Cheng, who has the very Maoist credential of an MBA from UCLA (Class of 1984), said, “China can stop buying dollar-denominated bonds, increase buying of US products and gradually reduce its holdings of US bonds.” Now, that is the only way out of the current mess the US and China have created between themselves. It would be great economic policy, but it runs up against US national security concerns. What the Americans still make better than anybody else is weaponry and computer stuff at the high end. Removing export restrictions on that isn’t going to happen anytime soon.

However, currency traders don’t read past the first punctuation mark in a sentence. What they read was “China can stop buying dollar-denominated bonds” and started screaming “sell dollars.” China’s Central Bank quickly stated that Mr. Cheng was speaking in a private capacity and his views didn’t represent blah, blah, blah. The point had been made.

Chinese president Hu Jintao pays Mr. Bush a visit in Washington later this month, and Mr. Cheng’s statement was a useful flexing of Chinese muscle in advance of this visit. After all, if a relatively unknown official speaking off the cuff can drop the buck fifty basis points, what could the Chinese president do if he made a formal announcement in a press conference?

Last week, according to the Financial Times, China overtook Japan as the nation with the largest foreign currency reserves, at US$853.6 billion. Most of it is denominated in US dollars, and most of the dollar-assets are US treasuries. A long-term program of liquidating these assets would put almost permanent pressure on the dollar, forcing up interest rates and slowing US economic growth. Mr. Bush should see what Mr. Hu wants when he visits.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

Home