By: Steve Watson
Monday, Jul 19th, 2010
Fears reemerge that China could resort to “nuclear option”
Prominent economists in China are calling for their government to ditch vast holdings of U.S. Treasuries in favour of tangible assets such as gold, a move that would have a far reaching impact on the economy.
Reuters reports that Yu Yongding, a former academic adviser to the Chinese central bank has appealed to state representatives to move away from U.S. debt and invest in assets denominated in other currencies, as well as other financial instruments and real goods.
“Although assets in other currencies and forms are not an ideal replacement for U.S. Treasury bonds, diversification should be a basic principle,” Yu wrote in the China Securities Journal.
“When demand for U.S. Treasury securities is strong, it’s a rare opportunity for us to gradually pull back. That way, it will not have a big impact on prices and China will not suffer too much,” he said.
Another influential financial expert, Zhang Monan, of the powerful think tank The State Information Center, also commented to the journal that China should replace increasing amounts of its foreign exchange reserves with hard assets such as gold.
The move could send gold prices back toward record highs following a recent slide.
China holds the world’s largest stockpile of reserves, worth some $2.5 trillion.
China cut its U.S. treasury holdings by $32.5 billion in May, yet it still holds $867.7 billion, making it the largest holder of U.S. government debt in the world.
In the past China has repeatedly threatened to use the so called “nuclear option” and liquidate its vast holding of US treasuries in response to continued pressure on the Communist state to force a yuan revaluation. Such an event could trigger a dollar crash which would now have disastrous consequences for an American economy mired in recession.
Such an eventuality could lead to runaway inflation, making the cost of living unaffordable to even middle class Americans as food prices skyrocket.
Further reports have suggested that Senior Chinese military officers have proposed selling U.S. bonds en mass as a way of “punishing” Washington.
China’s central bank has also previously supported calls for a new supra-national global currency to replace the dollar, and earlier this year strongly signaled that the country will move away from pegging its currency to the dollar.