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Their government wealth fund holds one of the largest USD reserves in the world, if not the largest. Theoretically, they could threaten to quickly unload it and

Their government wealth fund holds one of the largest USD reserves in the world, if not the largest. Theoretically, they could threaten to quickly unload it and send the USD tumbling if they don't get their way with some policy. Realistically, that won't happen, as the yuan is still pegged to the USD and the US is one of the largest importers of chinese stuff. It's not that far-fetched to think of some other worrying scenarios, though.

rortian 17y ago
Yes, it is in fact far fetched. They are powerless to do anything about their dollar reserves without losing substantial amounts of wealth.
dpatru 17y ago
As Peter Schiff has noted, if US dollar tumbles, holders of the dollar will be hurt, but the US itself will be wiped out. The situation is analogous to a stock market bubble. Holders of stocks with inflated values are hurt when the stocks lose their value, but the over-valued companies themselves go bankrupt. Furthermore, China would be better off if it consumed more of what it produces rather than sell it to Americans for American dollars and government bonds.
- geoffc 17y ago
  When stocks tumble the companies usually keep operating along, the shareholders take the big haircut.
  - ericd 17y ago
    Except when the company is cashflow negative and needs to continue issuing debt to operate. Once confidence in them is shot, and they can't find money to borrow, they file for bankruptcy. See the parallel?
- rortian 17y ago
  I wish you had just replaced Peter Schiff with, "Ron Paul's economic advisor" to save me some time. What you assert is simply untrue. It would be a good thing, currently, for the dollar to be devalued somewhat. Our exports would be cheaper to others and thus more attractive. Please cite credible people when you attempt to make extraordinary claims like 'the US itself will be wiped out'.
  - dpatru 17y ago
    Look up "peter schiff was right" and "peter schiff mortgage bankers speech" on youtube. At the time when "credible" people were predicting no recession and prosperity in perpetuity, Schiff was a contrarian voice predicting recession and a fall in housing prices. For example: see http://video.google.com/videoplay?docid=7879752717244782545# http://video.google.com/videoplay?docid=7879752717244782545# which shows side-by-side prognoses from Schiff and bullish pundits on CNBC and Fox News before the recession. You can't get to prosperity by devaluing your currency because prosperity depends on savings and investment and a falling currency encourages the opposite.
    - rortian 17y ago
      Alright, here's a problem for you, no one will assert that bullish pundits on CNBC are credible. http://www.cepr.net/index.php/dean-baker/ http://www.cepr.net/index.php/dean-baker/ Dean Baker is an actual economist and he called the housing bubble. I find your last sentence bizarre as it asserts as a truism something that is not really true at all. You believe people who are on the on the fringe of economics and seem to enjoy it so more power to you.
      - kiba 17y ago
        Your comment reeks of appeal to authority. You should at least demonstrate why "bullish" pundits are wrong. It doesn't matter if an economist is on the fringe of economics, especially a field that is notorious for not being able to predict much of anything. It matters if they are right, or wrong, how much, or it is just plain storytelling(and wrong!) in addition to lucky predictions.
Groxx 17y ago
Pulling it out would be M.A.D., it effectively won't happen. And given that the rest of the world would pretty much tumble with it, there'd be a mad scramble to protect the USA from bankrupting, and a mad attack on China for doing so. As evidence, just look how USA's economic downturns are reflected by others shortly after. They are likely to try to use the debt to pressure the USA though, which is still a fairly real threat. If they're not already, that is, I wouldn't be surprised (and it wouldn't be illogical for them to do so, it is in their best interest to have as much control as they can get).
- dsplittgerber 17y ago
  Worrying about this was one of the primary reasons for creating the U.S.-China Strategic and Economic Dialogue, so these topics are being adressed at the highest levels of both governments.
- _delirium 17y ago
  Yeah, I think China would avoid doing anything that looked like an outright hostile act, like dumping all its reserves simultaneously. If they did so, and the U.S. considers it a hostile act rather than merely commercial maneuvering, there are a pretty wide range of options to retaliate, which makes it something of a M.A.D. scenario. Among other things, the U.S. could void the $1t of outstanding Treasury bonds held by China, seize the assets of Chinese companies in the US, and/or ban imports from China. I think both countries would fare pretty poorly from an all-out economic/trade war, even if it didn't spill over into actual hostilities (there are edge scenarios where you can imagine e.g. an angry U.S. recognizing Taiwan's independence in retaliation).
lallysingh 17y ago
It's not #1. That's Japan. edit: the source: http://www.cnn.com/2010/BUSINESS/02/16/china.us.treasuries/index.html http://www.cnn.com/2010/BUSINESS/02/16/china.us.treasuries/i...
- dsplittgerber 17y ago
  Not true, it's China. "China’s foreign-exchange reserves now total $2.4 trillion, of which about 70% are thought to be in dollars." http://www.economist.com/business-finance/economics-focus/displaystory.cfm?story_id=15770808 http://www.economist.com/business-finance/economics-focus/di... http://en.wikipedia.org/wiki/List_of_countries_by_foreign_exchange_reserves http://en.wikipedia.org/wiki/List_of_countries_by_foreign_ex... Edit: Downvoting, seriously? If China has 2.4 trillion foreign currency reserves, 50-70% of which are USD, and Japan has 1.0 trillion foreign currency reserves totally, how can Japan ever be ahead of China? 2nd Edit: http://www.treas.gov/tic/mfh.txt http://www.treas.gov/tic/mfh.txt Seems like CNN/FT.com had it wrong?
  - borism 17y ago
    forex reserves != US public debt although China is #1 holder of both, US public debt held by China is 24.3% of total foreign ownership (Japan #2 @ 20%)
    - dsplittgerber 17y ago
      You are right of course, which is why I talked about USD reserves, not debt. Speaking about debt, China also holds ~400 billion of Fannie/Freddie bonds, which is not included in the official figure, neither for debt calculation, nor for foreign ownership, I guess.

rortian 17y ago

Yes, it is in fact far fetched. They are powerless to do anything about their dollar reserves without losing substantial amounts of wealth.

dpatru 17y ago

As Peter Schiff has noted, if US dollar tumbles, holders of the dollar will be hurt, but the US itself will be wiped out. The situation is analogous to a stock market bubble. Holders of stocks with inflated values are hurt when the stocks lose their value, but the over-valued companies themselves go bankrupt. Furthermore, China would be better off if it consumed more of what it produces rather than sell it to Americans for American dollars and government bonds.

geoffc 17y ago
When stocks tumble the companies usually keep operating along, the shareholders take the big haircut.
- ericd 17y ago
  Except when the company is cashflow negative and needs to continue issuing debt to operate. Once confidence in them is shot, and they can't find money to borrow, they file for bankruptcy. See the parallel?
rortian 17y ago
I wish you had just replaced Peter Schiff with, "Ron Paul's economic advisor" to save me some time. What you assert is simply untrue. It would be a good thing, currently, for the dollar to be devalued somewhat. Our exports would be cheaper to others and thus more attractive. Please cite credible people when you attempt to make extraordinary claims like 'the US itself will be wiped out'.
- dpatru 17y ago
  Look up "peter schiff was right" and "peter schiff mortgage bankers speech" on youtube. At the time when "credible" people were predicting no recession and prosperity in perpetuity, Schiff was a contrarian voice predicting recession and a fall in housing prices. For example: see http://video.google.com/videoplay?docid=7879752717244782545# http://video.google.com/videoplay?docid=7879752717244782545# which shows side-by-side prognoses from Schiff and bullish pundits on CNBC and Fox News before the recession. You can't get to prosperity by devaluing your currency because prosperity depends on savings and investment and a falling currency encourages the opposite.
  - rortian 17y ago
    Alright, here's a problem for you, no one will assert that bullish pundits on CNBC are credible. http://www.cepr.net/index.php/dean-baker/ http://www.cepr.net/index.php/dean-baker/ Dean Baker is an actual economist and he called the housing bubble. I find your last sentence bizarre as it asserts as a truism something that is not really true at all. You believe people who are on the on the fringe of economics and seem to enjoy it so more power to you.
    - kiba 17y ago
      Your comment reeks of appeal to authority. You should at least demonstrate why "bullish" pundits are wrong. It doesn't matter if an economist is on the fringe of economics, especially a field that is notorious for not being able to predict much of anything. It matters if they are right, or wrong, how much, or it is just plain storytelling(and wrong!) in addition to lucky predictions.

Groxx 17y ago

Pulling it out would be M.A.D., it effectively won't happen. And given that the rest of the world would pretty much tumble with it, there'd be a mad scramble to protect the USA from bankrupting, and a mad attack on China for doing so. As evidence, just look how USA's economic downturns are reflected by others shortly after. They are likely to try to use the debt to pressure the USA though, which is still a fairly real threat. If they're not already, that is, I wouldn't be surprised (and it wouldn't be illogical for them to do so, it is in their best interest to have as much control as they can get).

dsplittgerber 17y ago
Worrying about this was one of the primary reasons for creating the U.S.-China Strategic and Economic Dialogue, so these topics are being adressed at the highest levels of both governments.
_delirium 17y ago
Yeah, I think China would avoid doing anything that looked like an outright hostile act, like dumping all its reserves simultaneously. If they did so, and the U.S. considers it a hostile act rather than merely commercial maneuvering, there are a pretty wide range of options to retaliate, which makes it something of a M.A.D. scenario. Among other things, the U.S. could void the $1t of outstanding Treasury bonds held by China, seize the assets of Chinese companies in the US, and/or ban imports from China. I think both countries would fare pretty poorly from an all-out economic/trade war, even if it didn't spill over into actual hostilities (there are edge scenarios where you can imagine e.g. an angry U.S. recognizing Taiwan's independence in retaliation).

lallysingh 17y ago

It's not #1. That's Japan. edit: the source: http://www.cnn.com/2010/BUSINESS/02/16/china.us.treasuries/index.html http://www.cnn.com/2010/BUSINESS/02/16/china.us.treasuries/i...

dsplittgerber 17y ago
Not true, it's China. "China’s foreign-exchange reserves now total $2.4 trillion, of which about 70% are thought to be in dollars." http://www.economist.com/business-finance/economics-focus/displaystory.cfm?story_id=15770808 http://www.economist.com/business-finance/economics-focus/di... http://en.wikipedia.org/wiki/List_of_countries_by_foreign_exchange_reserves http://en.wikipedia.org/wiki/List_of_countries_by_foreign_ex... Edit: Downvoting, seriously? If China has 2.4 trillion foreign currency reserves, 50-70% of which are USD, and Japan has 1.0 trillion foreign currency reserves totally, how can Japan ever be ahead of China? 2nd Edit: http://www.treas.gov/tic/mfh.txt http://www.treas.gov/tic/mfh.txt Seems like CNN/FT.com had it wrong?
- borism 17y ago
  forex reserves != US public debt although China is #1 holder of both, US public debt held by China is 24.3% of total foreign ownership (Japan #2 @ 20%)
  - dsplittgerber 17y ago
    You are right of course, which is why I talked about USD reserves, not debt. Speaking about debt, China also holds ~400 billion of Fannie/Freddie bonds, which is not included in the official figure, neither for debt calculation, nor for foreign ownership, I guess.