Will China drop the bomb on the U.S. dollar?

A British reporter claims China is threatening to deploy its "nuclear option." But how is this news related to the "murder" of Vince Foster?

Published August 8, 2007 9:58PM (EDT)

Economic war! China prepares to deploy the "nuclear option"! Duck and cover! Writing in the Daily Telegraph, Ambrose Evans-Pritchard is very excited:

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.

The report immediately rocketed through financial markets, affecting treasury bond prices and rattling investors who are already nervous about stresses in the credit sector. And why not? According to Evans-Pritchard, "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 of foreign reserves as a political weapon to counter pressure from the U.S. Congress."

Let's everyone take a deep breath.

First, consider the source. Ambrose Evans-Pritchard has some history. As in, the man was famous in Washington, D.C., in the '90s for promulgating some of the more, uh, whacked-out conspiracy theories involving Bill and Hillary Clinton. Take a trip in the Way Back Machine, to Salon's review of his 1997 book "The Secret Life of Bill Clinton" (published, incidentally, by the inimitable Regnery Press, most recently notorious for foisting "Unfit for Command: Swift Boat Veterans Speak Out Against John Kerry" on our poor, benighted nation).

Of the many homicides he lays at the president's feet, "the Rosetta Stone" is what Evans-Pritchard calls the "extra-judicial execution" of White House counsel Vince Foster. He sees in this "murder," allegedly carried out at the behest of the White House inner circle and possibly on the direct orders of first lady Hillary Rodham Clinton, a sign of "incipient fascism" in the United States.

With that bit of background in mind, let's move on.

Evans-Pritchard takes as his primary evidence a section of an opinion piece published Aug. 7 in the China Daily under the byline of He Fan, who is identified by China Daily as "a researcher with the Institute of World Economics and Politics at the China Academy of Social Science." (Evans-Pritchard calls He Fan an "official" and says his quotes came in an "interview" with the China Daily, but to harp on such minor trivia seems like quibbling.)

In the context of defending China's snail-paced upward revaluation of the yuan, He Fan writes:

Thanks to the trade surplus, China has accumulated a large sum of U.S. dollars and its world largest foreign exchange reserve is mostly in U.S. dollars. Such a big sum, a considerable portion of which is in the form of U.S. treasury bonds, contributes a great deal to maintaining the position of the U.S. dollar as an international currency.

Russia, Switzerland and several other countries have restructured their foreign exchange reserve and reduced the U.S. dollars they hold. China is unlikely to follow suit as long as yuan's exchange rate is stable against the U.S. dollar.

If you're the kind of person who thinks Hillary Clinton may have ordered the murder of Vince Foster, then I can see how this passage could easily be interpreted as an implicit threat to go nuclear: Don't force us to revalue the yuan, or we'll pummel your dollar.

But how likely is that, really? I called Nick Lardy, a China analyst at the Peterson Institute for International Economics, and asked him if China might try to send such a message to the United States.

"The chances of the Chinese doing this are approximately zero," said Lardy.

China, said Lardy, has about $900 billion worth of U.S. dollar assets. But it could only sell a tiny fraction of those assets at any one time, and by doing so, would put immediate downward pressure on the value of the dollar. But if the value of the dollar dropped, so would the value of China's remaining dollar-denominated assets.

"They would take a loss of potentially massive proportions," said Lardy. "And since the No. 1 priority of central bankers everywhere is to maintain the value of their assets, it seems very unlikely."

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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