The sad fact of the matter is that China owns us. Today, they issued a reminder:
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.
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.
Paul Craig Roberts, Assistant Secretary of the Treasury under President Reagan, warned us about this possibility:
The hardest blow on Americans will fall when China does revalue its currency. When China’s currency ceases to be undervalued, American shoppers in Wal-Mart, where 70 percent of the goods on the shelves are made in China, will think they are in Neiman Marcus. Price increases will cause a dramatic reduction in American real incomes. If this coincides with rising interest rates and a setback in the housing market, American consumers will experience the hardest times since the Great Depression.
Ambrose Evans-Pritchard shrugs it off:
Which brings me to China, a country that is growing old before it ever becomes rich. The working-age population peaks in 2015 – just eight years time. China then dives into the steepest demographic decline ever known by any nation in peace-time. As for China’s current boom, you need only know three things so see where this is going: credit is being channelled for political purposes through Communist state banks that are not subject to market discipline; almost half of GDP is going on investment, leading to a glut of factories; return on that investment, measured by the incremental capital output ratio, is 4.4. Much of it is being wasted. Compare that to Japan (3.2), South Korea (3.2), and Taiwan (2.7) during their growth spurts. China is not going to take over the world economy, now or ever. The window will close shut before they get there.
No, the 21st Century will be the American century, just like the 20th Century. Americans may have to tighten their belts a bit after all the sins of Alan Greenspan and the Clinton-Bush debt generation. But the dollar will still be the world’s reserve currency long after the euro has disappeared and the yen has been forgotten… Now, the Indian Rupee? Hhm. Another day.
I think the truth is probably somewhere in the middle. I don’t expect a completely malicious attempt by the Chinese to undermine a massive market for their goods. Interdependence has it’s benefits too.
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