- The Washington Times - Tuesday, July 29, 2008

ANALYSIS/OPINION:

The Beijing Olympics give China a healthy dose of “soft power,” implying, as the games do, real international legitimacy. But there’s another, darker kind of nontraditional power China is currently amassing. The estimated $1.2 trillion in U.S. securities currently held by China or its investors and the expected $2.4 trillion in foreign currency reserves Beijing will hold by next year give this Communist government a very appreciable, oft-overlooked tool in the event of a crisis. Just listen to the word the Chinese state-run media use to describe the hypothetical dumping of China’s appreciable and rapidly growing store of assets - the “nuclear option.”

We draw readers’ attention to a must-read cover story of The Washington Times two days ago, which shows the full implications of China’s growing financial muscle in the event of a Taiwan Strait war or some other escalation between Communist China and the United States.

Here are the numbers. China’s foreign-exchange reserves today total $1.8 trillion, a quadrupling over the last four years. The International Monetary Fund expects that figure to rise by more than another half trillion next year. As The Times report notes, about three-quarters of the $1.8 trillion is said to be U.S. dollars, though the figure isn’t known. Communist China treats the number as a “state secret” - another indicator that these holdings are not routine business as they would be in Western democracies and most other countries.

It is not just foreign currency. China’s holding of U.S. securities have tripled over a comparable period, from over $300 billion in 2004 to more than $900 billion by the middle of last year. (None of which should suggest that the Chinese have proven themselves brilliant investors. China is by far the biggest foreign holder of Fannie Mae’s and Freddie Mac’s asset-backed securities.)

Couldn’t China’s intentions here be purely economic? “There is a balance of financial terror,” China expert Carl Weinberg told The Times, and in this balance a mass dumping would harm China more than it would harm the United States. A great many analysts are sanguine on this account. Surely the relationship is symbiotic.

But the Chinese know their own power, and they occasionally refer to it publicly in geopolitical terms. Xia Bin, finance chief at China’s Development Research Center, last year suggested that foreign reserves could serve as a “bargaining chip” to influence U.S. policy, as The Times weekend story reports. Though milder than the “nuclear option” the Chinese state media sometimes discuss, this nevertheless prompted an official denial.

Even if the nightmare scenario of mass Chinese asset-dumping is unlikely, this power could still be used to deter certain actions or shape U.S. policy in a crisis. Recently, Pete Peterson, co-founder of the private equity firm the Blackstone Group, referred to President Eisenhower’s Suez Canal diplomacy to illustrate the point. Ike threatened to dump U.S. reserves of the British pound unless the British relinquished the canal - which they did.

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