China Threatens the Dollar — Update
Kurt Brouwer August 8th, 2007
Jon Henke at the Qando blog weighs in on the China currency threat. His take on this gambit by China was similar to my previous post, China Threatens the Dollar. In his post, Henke wrote [emphasis added]:
‘…Granted, if China floods the market with US dollars, the dollar will decline in relative value and that would cause some problems for the US for a time. But at what cost to China? Sure, they might create a minor economic problem for the US, but they would create two massive problems for China…
- A massive sell-off of US securities will push down the value of those securities, leaving China with a massive potential value loss on their currency/security holdings.
- China’s economy is unusually dependent on exports. They do so well with exports, in part, because it’s so cheap to buy from them. If the US dollar declines, Chinese exports become more expensive for us. If our currency declines significantly, it will either depress our demand for those export goods or shift it to other countries. (not to mention the unpredictable potential political reaction against China) China doesn’t have the economic diversity or sociopolitical stability to take that kind of hit to their export-driven economy very easily…’
I think his points are accurate. And, I understand how the Chinese government might feel they need to rebut the protectionism talk bouncing around the halls of Congress. However, this approach is very aggressive and could easily ratchet up the rhetoric.
- Geopolitics , Money
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