Sigh. Another 'China dumping dollars' story

Posted By Blake Hounshell Wednesday, February 10, 2010 - 11:28 AM Share

Stories about Chinese officials threatening to dump the dollar, no matter how implausible, are always great Internet fodder. Today's entry: This Reuters report about a couple senior PLA officers who are pushing the idea that China should retaliate against U.S. arms sales to Taiwan by selling some of the nearly $800 billion Treasury bonds Beijing has on its books.

Only at the bottom do you learn this helpful context:

But any attempt to use that stake against Washington would probably maul the value of China's own dollar-denominated assets.

We also rarely get a sense in such wire reports of just what sort of influence such officials have. Are they on the fringe? Respected insiders? Hard-liners with a growing following? That kind of information would be helpful for those of us who aren't intimately familiar with internal Chinese politics.

UPDATE: More from Ashby Monk, who quotes a correspondent in Britain thusly:

[A]t a conference ... I asked what the White House would do if it received a call from Beijing saying that “unless the USA did XX or desisted from YY by a given deadline, China proposed to sell all its dollar assets without concern as to price”.

We came to a conclusion then that it was in fact something of a hollow threat. To start with, the US authorities (via the Federal Reserve) can buy any dollar bonds the Chinese wish to sell: it will explode the Fed’s balance sheet, but it can be done. It is more problematic if the Chinese sell dollars on the FX market, as the US authorities cannot simply buy them all, as they do not have enough foreign currency and could not mobilise their gold fast enough. So the dollar’s exchange rate would spike sharply down, before (probably) spiking back up again to near the level it started at – offset a bit because one would assume that having just utilised their dollars in this way, China would not immediately buy them back and so the main forced buyer of dollars would be removed from the market.

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