This was published 16 years ago
China steps up currency fight by 'absurd' threat to sell $US
By Krissah Williams
A CHINESE Government researcher has issued a veiled threat to US policymakers not to get too tough in insisting the Chinese yuan should appreciate.
The researcher, He Fan, told the state-run China Daily that China had accumulated "a large sum of US dollars" and that its holdings contributed "a great deal to maintaining the position of the US dollar as an international currency".
If the yuan's exchange rate against the dollar did not remain stable, said Mr He, who works at the China Academy of Social Sciences, China could be forced to take strong action.
China has $US1.33 trillion ($1.55 trillion) in foreign exchange reserves, with $US407 billion in US Treasuries, the second largest after Japan. A substantial sell-off of the reserves could spark a recession in the US economy, financial analysts said.
"I don't think that this is a real threat that China is about to unload its dollar holdings - but merely the mention of it should be enough to make Congress sit up and take notice," said Simon Derrick, Bank of New York's chief currency strategist in London.
Mr He's statements were an apparent response to the US Senate Finance Committee, which last month approved legislation aimed at pressing for faster appreciation of the yuan. While the Chinese academies are not the official voice of the Chinese government, researchers' comments often best reflect the mood in Beijing.
If China was to dump its US currency, it would hurt its own pocketbook because it is such a large investor. "There would be turmoil in the financial markets," said Menzie D Chinn, professor of economics at the University of Wisconsin. "It's not really a credible threat."
The US Treasury Secretary, Henry Paulson, who met Chinese leaders in Beijing last week and told them to raise the currency's value without delay, called Mr He's comments "frankly absurd". "China's economic relationship with the United States is very important to both countries.
"And then another point I've made for some time is … what the Chinese hold in treasuries is less than one day's trading volume in treasuries. We have a broad, liquid market."
Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington DC, said the Chinese researchers are probably attempting to remind Congress that "this is a relationship of mutual interdependence, not a one-way street".
The Washington Post