Another Shot in Currency Fight: Chinese Threaten Divestment

Another Shot in Currency Fight: Chinese Threaten Divestment

By Krissah Williams

Washington Post Staff Writer

Thursday, 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.