Sunday, July 27, 2008

China could dump US financial holdings

The Washington Times has a major Sunday magazine Cover Story (July 27) on p 5, by David M. Dickson, “China’s Economic ‘Bargaining Chip’: Massive holdings in U.S. create ‘financial muscle’”. In fact the newspaper’s cover reads “Balance of financial terror.” The link for the story is here.

In 2004, China held about $450 billion in “foreign currencies” and about $300 billion in American securities. Since then, the US has added $1.2 trillion in budget deficits and $3 million in trade deficits.

The basic concern is that China could “dump” its holdings, further driving down the U.S. dollar, and escalating the price of oil again. But then Chinese exports would go down. This might not be in China’s “self interest” according to a “mutually assured destruction” theory. But, given international pressures to improve wages and worker conditions in China, which might increase with the Olympics even given Chinese internal censorship, it would sound that such a scenario could develop.

Although China vigorously suppresses criticism and dissent in its own country, it would sound plausible that worldwide criticism of its practices could also trigger this sort of behavior.

China is also under some pressure from world health authorities, not only because of its performance after the earthquake, but because of agricultural practices in rural areas that increase the risk of avian influenza and similar pandemics resulting from viral mutations when people and livestock mix.

In the past, there has been considerable similar concern about Arab holdings in US companies.

Donal Trump reports that foreign (Chinese and Arab) purchases of condos and office buildings are keeping Manhattan real estate prices booming even during the subprime crisis.

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