China Threatens to Dump U.S. Treasury Bonds Over Taiwan Arms Sales
Wednesday, February 10, 2010 at 4:13 pm
Majors General Zhu Chenghu and Luo Yuan and Colonel Ke Chungqio of the Chinese People’s Liberation Army were quoted in an official Chinese publication calling for the Chinese government to retaliate against the United States economically for the recent decision to sell $6.4 billion of arms to Taiwan. China has already announced unspecified sanctions against U.S. companies that participate in the sale.
Luo, also a researcher at the Chinese Academy of Military Sciences, doesn’t think those sanctions go far enough. He told China’s Outlook Weekly:
“We should go in for a strategic mix of retaliation across politics, military matters, diplomacy and economics… For example, we could sanction them using economic means, such as by dumping some US government bonds.”
China has quite the history of threatening to dump its U.S. Treasury bond holdings in retaliation for unspecified U.S. actions or to achieve specific economic ends. Reuters notes that China is currently the largest holder of U.S. Treasuries, and has actually doubled its holdings since 2007.
Some economists think it’s all just posturing, particularly as the military has little influence over economic regulators in China. India’s Daily News & Analysis reports that most analysts recognize that if China dumps its Treasuries, it will do as much damage to its own economy as to the United States’:
[Patrick Chovanec, associate professor at Tsinghua University in Beijing said] “The Chinese economy continues to depend on exporting products for dollars – and accumulating even more dollars,” noted Chovanac. Chinese exports, GDP growth employment — all of it depended on China’s continued ability to sell product for dollars.
In other words, selling Treasuries would devalue the dollar, causing China to hurt its own ability to export to the United States — which is still the engine of its economy. Furthermore, Chovanec added that if China simply wanted to devalue the dollar, it could stop artificially devaluing its currency against the dollar, which is what the United States wants and China has resisted for years.
Dumping U.S. Treasuries en masse would be the economic equivalent of China cutting off its nose to spite its face, and the people in charge of China’s economy recognize that (for now). That there are some there who value the One-China policy above all else is little surprise; that they’re not in charge of China’s economy should come as little, too.
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