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CHINA’S ‘NUCLEAR OPTION’ EXPOSED

During your interview, Craig reveals that the Mattel toy recalls of Chinese-made products coupled with Hillary Clinton's call for restrictive legislation in Congress could potentially trigger a trade war -- sending U.S. interest rates, inflation and gold skyrocketing, while crushing the dollar and pushing the U.S economy into a recession or worse.

 

Said Smith, “As Americans, we often make the mistake that people in other countries think just like we do. We assume that no other nation would consider committing financial suicide but we must remember that the Chinese government consists of individuals who are not capitalists; they are Communists. North Korean President Kim Jong-il was willing to starve millions of his citizens rather than dropping his pursuit of nuclear weapons and join the democratic economic world. China also wouldn’t hesitate to starve their own people to beat us in a trade war.”

 

Smith says that the dilemma here is that China will not hesitate to dump hundreds of billions of US dollars on the open market if we press them too hard on this matter and that we are ill prepared to wage a trade war with China. The long term solution is to have Americans significantly cut down on purchasing Chinese-made goods and to be willing to pay more for higher quality products made in America or in other western nations that are willing to meet stricter manufacturing standards. But in the short term, American politicians need tread lightly with China.

  THE FOLLOWING ARTICLE MAY BE HELPFUL WITH SHOW PREP:

China threatens 'nuclear option' of dollar sales
By Ambrose Evans-Pritchard
Daily Telegraph/ 10/08/2007

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing's foreign reserves should be used as a "bargaining chip" in talks with the US.

"Of course, China doesn't want any undesirable phenomenon in the global financial order," he added.

He Fan, an official at the Chinese Academy of Social Sciences, went even further today, letting it be known that Beijing had the power to set off a dollar collapse if it choose to do so.

"China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland, and several other countries have reduced the their dollar holdings.

"China is unlikely to follow suit as long as the yuan's exchange rate is stable against the dollar. The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar," he told China Daily.

The threats play into the presidential electoral campaign of Hillary Clinton, who has called for restrictive legislation to prevent America being "held hostage to economic decisions being made in Beijing, Shanghai, or Tokyo".

She said foreign control over 44pc of the US national debt had left America acutely vulnerable.

Simon Derrick, a currency strategist at the Bank of New York Mellon, said the comments were a message to the US Senate as Capitol Hill prepares legislation for the Autumn session.

"The words are alarming and unambiguous. This carries a clear political threat and could have very serious consequences at a time when the credit markets are already afraid of contagion from the subprime troubles," he said.

A bill drafted by a group of US senators, and backed by the Senate Finance Committee, calls for trade tariffs against Chinese goods as retaliation for alleged currency manipulation.

The yuan has appreciated 9pc against the dollar over the last two years under a crawling peg but it has failed to halt the rise of China's trade surplus, which reached $26.9bn in June.

Henry Paulson, the US Treasury Secretary, said any such sanctions would undermine American authority and "could trigger a global cycle of protectionist legislation".