Blogs & Comment

Will China do a Suez on the U.S?

Many analysts have warned that Chinas position as a major lender to the U.S. Government means Americas standard of living and freedom to setits own course is dependent on another country. If China were to dump its vast holdings of U.S. Treasuries abd dollars, it would send U.S. interest rates shooting upward and the U.S. dollar tumbling downward.
Other analysts argue this scenario is unlikely. If China were to jettison its U.S. bonds, it would deliver a shock to its own economy. The yuan would jump and cut off its export-led growth. Just like anintercontinental nuclear war long ago was ruled unlikely to occur because of the principle of mutually assured destruction (MAD), an economic war will not happen in the current climate because it is MAD.
However, I came across an interesting extension of this debate in a book I am currently reading, Buying at the Point of Maximum Pessimismby Scott Phillips. He says the Chinese threat should not be ignored because such threats have been used before inworld history. Indeed, the U.S. successfully threatened this same strategy on Great Britain in 1956 during a dispute whether to engage in military action over the Suez Canal.
Although the U.S. did not sell its substantial holding of pounds, the threat alone was enough to send the pounds value plummeting. Many observers cite this event as the defining moment in Great Britains loss of its status as an empire.
China is not likely prepared just yetto do something similar. It still needs the U.S. as a trading partner. However, its economic position will change over time as China continues to develop and builds a larger domestic economy, warns Phillips.
In other words, there may come a time when China doesnt need the U.S. as a trading partner. It is important that the U.S. get its financial house in order before that time arrives, advises Phillips.