http:\/\/www.atimes.com\/article\/china-tiptoes-toward-massive-retaliation-trade-war\/
\noOf all the economic threats exchanged recently, the most frightful came from a man most readers might have to google: Cui Tiankai, China\u2019s ambassador to the US. That is saying a lot, considering the tariff arms race being waged between Washington and Beijing.<\/p>\n
First, Donald Trump threw US$50 billion Xi Jinping\u2019s way. When China matched that amount, President Donald Trump threatened to toss another $100 billion of levies into the fire. But that is mere noise compared to Cui\u2019s suggestion that Beijing, America\u2019s main banker, might consider scaling back on US Treasuries purchases.<\/p>\n
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Tariffs will hurt, certainly. The biggest trade powers engaged in a protectionist tit-for-tat will end badly for the entire global economy. But Cui\u2019s not-so-veiled threat is something bigger. To understand why let\u2019s go back 21 years to New York\u2019s Columbia University.<\/p>\n
Ultimate trade war weapon<\/p>\n
There, in June 1997, then-Japanese Prime Minister Ryutaro Hashimoto was giving a rather dry speech about economic cooperation. That was until the question-and-answer period, when he suggested Tokyo might sell Treasuries holdings if Washington didn\u2019t reduce dollar-yen volatility. \u201cSeveral times in the past we have been tempted to sell large lots of US Treasuries,\u201d he said.<\/p>\n
Japanese officials scrambled to walk-back the comments, denying that Hashimoto was threatening US trade negotiators. But the damage was done. By admitting that Tokyo had considered dumping dollars during tense auto-import talks, Hashimoto validated traders\u2019 worst fears: politics could someday devastate markets.<\/p>\n
The dollar, after all, is the lynchpin of the world economy. In the months after Hashimoto\u2019s Columbia University appearance, markets tracked Bank of Japan data daily to see if a giant sell order had been executed. It had not. Hashimoto\u2019s warning shot at US policymakers was eventually forgotten.<\/p>\n
The issue flared up anew in August 2011. Beijing was unhappy with then-US President Barack Obama\u2019s perceived closeness to Taiwan. That had policy wags mulling creative ways to get the White House\u2019s attention, including using Beijing\u2019s vast dollar holdings as leverage.<\/p>\n
\u201cNow is the time,\u201d the state-run People\u2019s Daily argued in an editorial on the topic, \u201cfor China to use its financial weapon to teach the US a lesson.\u201d<\/p>\n
Tough or bluff ?<\/p>\n
It didn\u2019t happen, of course. A dollar fire sale could slam global growth in ways that would boomerang back to China. Aside from massive paper losses on Beijing\u2019s $1.2 trillion of Treasury debt holdings, the resulting surge in US yields could savage the American consumer on which Chinese growth relies. That might imperil the trajectory of China\u2019s debt-and-credit-driven growth.<\/p>\n
It is also worth noting that China and Japan are, to some extent, trapped. Any transparent effort to shift from dollars to, say, gold, would panic markets. As far back as 2009, then-Premier Wen Jiabao seemed to see the writing on the proverbial wall. He worried that Washington\u2019s massive stimulus efforts might erode the value of Beijing\u2019s Treasuries.<\/p>\n
\u201cWe have made a huge amount of loans to the United States,\u201d Wen said. \u201cOf course, we are concerned about the safety of our assets. To be honest, I am a little bit worried.\u201d He called on the US \u201cto honor its words, stay a credible nation and ensure the safety of Chinese assets.\u201d<\/p>\n
Fast-forward eight years to December 2017. Wen\u2019s successors couldn\u2019t have been happy to see Trump\u2019s Republican Party passing a $1.5 trillion tax cut the US economy didn\u2019t need. Trump\u2019s party is taking for granted that Beijing and Tokyo will dutifully gobble up more dollar debt, financing Washington\u2019s fiscal boost.<\/p>\n
Beijing\u2019s concerns are plenty valid. In 2011, two years after Wen\u2019s plea, Standard & Poor\u2019s downgraded Washington, the first credit-rating company to yank away its AAA status. America\u2019s balance sheet has been larded up exponentially since then. And now Trump\u2019s trade war risks repelling Washington\u2019s Asian bankers.<\/p>\n
As Cui, China\u2019s man in Washington, suggests, Xi\u2019s team is now \u201clooking at all options.\u201d While Trump doing his worst with tariffs is worrying, the idea of Xi pulling the plug on the dollar is positively terrifying.<\/p>\n
Trump must remember that even though he runs the biggest economy, Xi holds the deed.<\/p>\n","protected":false},"excerpt":{"rendered":"
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