China threatens to dump U.S. dollars - Reduce your risk

August 15, 2007

China recently threatened to sell part its $400 - $900 billion in U.S. dollars if Congressional pressure to raise the value of the yuan continued.  An official at the Chinese Academy of Social Sciences, He Fan, said last week, "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." 

Mr. Fan mentioned that China did not want to follow the example of Russia, Switzerland and several other countries who have recently lessened their dollar holdings. However, he said that China is now one of the main reasons that the U.S. dollar is still the world's reserve currency.

Lower level Chinese officials are often used to signal the true desire of China's leadership, thus preserving the ability to save face. In fact, on Monday a spokesman for China's central bank said it had no intention of dumping dollars. (Source: UK Telegraph, China threatens nuclear option of dollar sales, 8/10/07; Ria Novosti, China says no intention of selling dollar reserves, 8/13/07; U.S. Treasury, Major Foreign Holdings of Treasury Securities, May 2007).

What China's threat to dump U.S. dollars means:

China will probably not dump U.S. dollars because it will not benefit from a dollar collapse that would limit the buying power of its most important customer.

However, it is signaling that the world order is subtly shifting, simply because it is reminding the U.S. that it does have the economic power to depress the American economy. China is rattling its sabers to prevent further tariffs and sanctions threatened by the U.S. Congress. It is aware that this pressure will only intensify over the next 18 months as the Presidential election heats up. (See U.S. tariff damages China relations, 4/4/07)

Action steps:

Protect yourself from a dollar collapse by reading the World Money Watch Special Report, “The Dollar Collapse." Understand how China got to be America's banker in the World Money Watch Special Report, "Profit from China's Growth." 

Related articles:

Paulson visits China again, 8/8/07

China's bank raised interest rates, 3/24/07

Sec'y Paulson at the G-7, 9/20/06

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