China's economic muscle is growing by the day and it is also flexing it. And you won't believe it, it's the US that is being threatened. An article has appeared in a Chinese newspaper in which a Chinese economist has issued a warning that if the US tries to force China into making the yuan rise faster against the US Dollar the Chinese Government might retaliate by liquidating its holdings of US treasuries.
Although it is nowhere like a threat to nuke Washington D.C. the results, some experts say could be as bad for the financial markets. China holds about 1.3 trillion dollars worth of foreign currency reserves and about a third of them are invested in U.S. treasuries, second in size only to Japan. Its trade surplus with the U.S. for the month of July 2007 was about 23 billion dollars. A dumping of U.S. treasuries, some believe would cause a collapse of the U.S. Dollar against the world's major currencies and would push the U.S. economy into recession.
But all economists do not agree with this gloomy scenario. They are quick to point out that China itself has a vested interest in having a stable U.S. dollar because any sharp fall in its value will cause significant losses to the Chinese as well by reducing the value of its holdings. Still others feel that the treasuries market is so huge that such Chinese action would hardly make a difference.
In all probability the Chinese Government is simply outlining it bargaining position. Whatever maybe the final result, it is now absolutely clear that China is in a position to retaliate against the U.S. economically as well.