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September 20, 2007

Is China Launching the Nuclear Option on Dollar Sales?

posted by MR WAVETHEORY at 9/20/2007 01:11:00 AM
The yuan (aka renminbi) strengthened immediately following the US rate cute on Tuesday, triggering fears that China is launching a nuclear option against US dollars. While the US is cutting rates because of slowing growth, China is raising rates because of fast growth and inflation. In fact, inflation is getting so bad in China that Beijing issued a price freeze! You heard right, they are putting in government price controls on everything ranging from oil, electricity and water to the cost of parking and park entrance fees.

Before trading started on Wednesday morning, the People's Bank of China (PBOC) set the yuan midpoint at 7.5170 against the greenback, compared with 7.5266 on the previous day. The yuan may rise or fall 0.5 percent from the mid-point each day.

It's all about fighting inflation ahead of the Communist party meeting on October 15th. “Any unauthorised price rises are strictly forbidden . . . and in principle there will be no new price-raising measures this year,” the ministries said. Events since the initial State Council announcement that inflation in August hit an 11-year high of 6.5 per cent appear to have galvanised the bureaucracy into a tougher stance.

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.

Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing's foreign reserves should be used as a "bargaining chip" in talks with the US.

He Fan, an official at the Chinese Academy of Social Sciences, went even further today, letting it be known that Beijing had the power to set off a dollar collapse if it choose to do so.

"China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland, and several other countries have reduced the their dollar holdings.

The threats play into the presidential electoral campaign of Hillary Clinton, who has called for restrictive legislation to prevent America being "held hostage to economic decicions being made in Beijing, Shanghai, or Tokyo".

She said foreign control over 44pc of the US national debt had left America acutely vulnerable.

Hilary, maybe the problem is not China, but the free spending ways of Americans caused by Greenspan's 14 consecutive rate cuts and Ben Bernanke's insistence to follow in his footsteps! America is in a tough spot because of all those free credit cards and 0% offers that Greenspan lavished on consumers with his 1% interest rate! Just when consumers are being taught a lesson, Bernanke cuts rates and gives consumers more rope to hang themselves!?

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