On Tuesday, Sen. Joe Lieberman issued a stern warning to Beijing that a bill “that would require the administration to pursue currency manipulation cases before the International Monetary Fund” that was approved by the Senate Finance Committee should be taken “very seriously,” AP reported Tuesday.[1]  --  Paul Craig Roberts, however, suggested on Wednesday that it is U.S. leaders who should take very seriously a statement by a Chinese government researcher that its position in U.S. dollars and Treasury bonds “contributes a great deal to maintaining the position of the dollar as a reserve currency,” and should the U.S. proceed with sanctions intended to cause the Chinese currency to appreciate, “the Chinese central bank will be forced to sell dollars, which might lead to a mass depreciation of the dollar.”[2]  --  Ambrose Evans-Pritchard, in a story in the London Daily Telegraph that called attention to the Chinese threat, called the warning part of “a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of U.S. treasuries if Washington imposes trade sanctions to force a yuan revaluation.”[3]  --  Provoking a dollar collapse is what the Chinese call their “nuclear option.”  --  AFP reported that President George W. Bush said in a Fox News interview that he had not seen the report, but that “That would be foolhardy of them to do that.”[4]  --  The Washington Post also downplayed the threat, saying that “Market analysts read He's statements as the beginning of a more politicized approach by the Chinese government but said a sell-off is unlikely.”[5] ...



Associated Press
August 7, 2007


BEIJING -- Sen. Joe Lieberman told Chinese lawmakers Tuesday a Senate panel measure that could lead to possible sanctions against Beijing should be taken as a warning of America's frustration over the nation's currency valuation.

"I think it should be taken very seriously here in Beijing," said Lieberman, of Connecticut, after meeting with leaders of China's legislature, the National People's Congress.

Last week, the Senate Finance Committee approved, by a lopsided 20-1 vote, a bill that would require the administration to pursue currency manipulation cases before the International Monetary Fund.

Critics contend Beijing keeps its currency, the yuan, undervalued by up to 40 percent, giving its exporters an unfair price advantage and adding to its multibillion-dollar trade surplus.

U.S. Treasury Secretary Henry Paulson and other officials are trying to forestall drastic action by Congress. Paulson is leading a "strategic economic dialogue" with Beijing over currency and other disputes, and says it is producing results.

Meeting with Chinese legislators, "I said I thought the vote on the currency legislation should be taken as a warning, and to the extent that it is possible to accelerate the appreciation of the currency here, it would be a step in the right direction," Lieberman said.

The Communist Beijing government has eased controls on the yuan and says it is pursuing other reforms sought by Washington. But it says moving too abruptly will cause financial turmoil.

Lieberman, an independent who is chairman of the Senate Homeland Security and Governmental Affairs Committee, was due to meet later with Chinese Foreign Ministry officials. He was not scheduled to meet with Chinese leaders or senior trade officials.


By Paul Craig Roberts

** Uncle Sam, Your Banker Will See You Now ... **

August 8, 2007


Early this morning China let the idiots in Washington, and on Wall Street, know that it has them by the short hairs. Two senior spokesmen for the Chinese government observed that China’s considerable holdings of U.S. dollars and Treasury bonds “contributes a great deal to maintaining the position of the dollar as a reserve currency.”

Should the U.S. proceed with sanctions intended to cause the Chinese currency to appreciate, “the Chinese central bank will be forced to sell dollars, which might lead to a mass depreciation of the dollar.”

If Western financial markets are sufficiently intelligent to comprehend the message, U.S. interest rates will rise regardless of any further action by China. At this point, China does not need to sell a single bond. In an instant, China has made it clear that U.S. interest rates depend on China, not on the Federal Reserve.

The precarious position of the U.S. dollar as reserve currency has been thoroughly ignored and denied. The delusion that the U.S. is “the world’s sole superpower,” whose currency is desirable regardless of its excess supply, reflects American hubris, not reality. This hubris is so extreme that only 6 weeks ago McKinsey Global Institute published a study that concluded that even a doubling of the U.S. current account deficit to $1.6 trillion would pose no problem.

Strategic thinkers, if any remain who have not been purged by neocons, will quickly conclude that China’s power over the value of the dollar and U.S. interest rates also gives China power over U.S. foreign policy. The U.S. was able to attack Afghanistan and Iraq only because China provided the largest part of the financing for Bush’s wars.

If China ceased to buy U.S. Treasuries, Bush’s wars would end. The savings rate of U.S. consumers is essentially zero, and several million are afflicted with mortgages that they cannot afford. With Bush’s budget in deficit and with no room in the U.S. consumer’s budget for a tax increase, Bush’s wars can only be financed by foreigners.

No country on earth, except for Israel, supports the Bush regimes’ desire to attack Iran. It is China’s decision whether it calls in the U.S. ambassador, and delivers the message that there will be no attack on Iran or further war unless the U.S. is prepared to buy back $900 billion in U.S. Treasury bonds and other dollar assets.

The U.S., of course, has no foreign reserves with which to make the purchase. The impact of such a large sale on U.S. interest rates would wreck the U.S. economy and effectively end Bush’s war-making capability. Moreover, other governments would likely follow the Chinese lead, as the main support for the U.S. dollar has been China’s willingness to accumulate them. If the largest holder dumped the dollar, other countries would dump dollars, too.

The value and purchasing power of the U.S. dollar would fall. When hard-pressed Americans went to Wal-Mart to make their purchases, the new prices would make them think they had wandered into Nieman Marcus. Americans would not be able to maintain their current living standard.

Simultaneously, Americans would be hit either with tax increases in order to close a budget deficit that foreigners will no longer finance or with large cuts in income security programs. The only other source of budgetary finance would be for the government to print money to pay its bills. In this event, Americans would experience inflation in addition to higher prices from dollar devaluation.

This is a grim outlook. We got in this position because our leaders are ignorant fools. So are our economists, many of whom are paid shills for some interest group. So are our corporate leaders whose greed gave China power over the U.S. by offshoring the U.S. production of goods and services to China. It was the corporate fat cats who turned U.S. Gross Domestic Product into Chinese imports, and it was the “free trade, free market economists” who egged it on.

How did a people as stupid as Americans get so full of hubris?

--Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.He can be reached at: This email address is being protected from spambots. You need JavaScript enabled to view it.



By Ambrose Evans-Pritchard

Daily Telegraph
August 9, 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 U.S. treasuries if Washington imposes trade sanctions to force a yuan revaluation.

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 U.S. 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 U.S. currency is already breaking down through historic support levels.

It would also cause a spike in U.S. bond yields, hammering the U.S. housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of U.S. bonds.

Xia Bin, finance chief at the Development Research Center (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 U.S.

"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 U.S. dollars. Such a big sum, of which a considerable portion is in U.S. 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 decisions being made in Beijing, Shanghai, or Tokyo."

She said foreign control over 44pc of the U.S. 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 U.S. 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 U.S. 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 U.S. Treasury 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 waters.



Agence France-Presse
August 8, 2007


President George W. Bush on Wednesday said China would be "foolhardy" to attempt to push down the dollar in retaliation for U.S. 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 Beijing 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."

U.S. Treasury Secretary Henry Paulson meanwhile said on CNBC that suggestions that China was considering selling off dollar denominated assets to hammer the already weakened U.S. 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 Friday as Washington and the U.S. 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 U.S. sanctions designed to punish Beijing for yuan manipulation.



U.S. economy

By Krissah Williams

Washington Post
August 9, 2007
Page D01


In a Wednesday opinion piece in the state-run *China Daily*, a Chinese government researcher made what sounded like a warning to U.S. policymakers not to get too tough in insisting the yuan should appreciate.

The researcher, He Fan, noted that China has accumulated "a large sum of U.S. dollars" and that its holdings contribute "a great deal to maintaining the position of the U.S. dollar as an international currency." If the yuan's exchange-rate against the dollar does not remain stable, he said, China could be forced to take strong action.

China has $1.33 trillion in foreign-exchange reserves, with $407 billion in U.S. Treasuries, the second-largest holder after Japan. A substantial sell-off of the reserves could spark a recession in the U.S. economy, which is already experiencing a housing slump, financial analysts said.

Market analysts read He's statements as the beginning of a more politicized approach by the Chinese government but said a sell-off is unlikely.

"I don't think that this is a real threat that China is about to unload its dollar holdings, but merely the mention of it should be enough to make Congress sit up and take notice," said Simon Derrick, Bank of New York's chief currency strategist in London.

He's statements were an apparent response to the Senate Finance Committee, which last month approved legislation aimed at pressing for faster appreciation of the yuan.

"The Chinese central bank will be forced to sell U.S. dollars once the [yuan] appreciates dramatically, which might lead to a mass depreciation of the U.S dollar against other currencies," wrote He, who works at the China Academy of Social Sciences. While the Chinese academies are not the official voice of the Chinese government, researchers' comments often best reflect the mood in Beijing.

The Daily Telegraph of London also quoted Xia Bin, director of the financial research department of the State Council, which advises the Chinese cabinet, describing Beijing's foreign reserves as a "bargaining chip."

If China were to execute the so-called nuclear option, by dumping U.S. currency and lowering the value of the dollar, it would hurt its own pocketbook because it is such a large investor. "There would be turmoil in the financial markets," said Menzie D. Chinn, professor of economics at the University of Wisconsin. "It's not really a credible threat."

Treasury Secretary Henry M. Paulson Jr., who met with Chinese leaders in Beijing last week and told them to raise the currency's value without delay, called He's comments "frankly absurd," in a CNBC interview yesterday. "China's economic relationship with the United States is very important to both countries. It's beneficial for us, and it is beneficial for them. We have tensions that we have to deal with on both sides.

"And then another point I've made for some time is the Chinese are the second-largest holder of U.S. Treasuries, but what the Chinese hold in treasuries is less than one day's trading volume in treasuries. We have a broad, liquid market."

Economists echoed Paulson's statements. Nicholas R. Lardy, a senior fellow at the Peterson Institute for International Economics in the District, said the Chinese researchers are probably attempting to remind Congress that "this is a relationship of mutual interdependence, not a one-way street."

Senators sponsoring a bill aimed at forcing China to more quickly raise the value of its currency by giving the Treasury Department new tools to pressure Beijing do not see it that way.

They are worried about the large trade deficit between the two nations. China's trade surplus probably jumped almost 60 percent in July, widening to $23.1 billion from $14.6 billion a year earlier, according to a Bloomberg News poll of 18 economists released yesterday.

Sen. Charles E. Schumer (D-N.Y.) said in a statement that "actions of this sort by the Chinese show they don't want to play by the [World Trade Organization's] rules when it might advantage another country." Sen. Lindsey O. Graham (R-S.C.) said in a statement that he "would advise our Chinese trading partners to work with us to achieve meaningful currency reform rather than issuing draconian threats. Congress has been incredibly patient on this issue, and the consequences of inaction without real reform are too great to many sectors of our economy."

--Correspondent Ariana Eunjung Cha in Shanghai contributed to this report.