- The Washington Times - Wednesday, March 2, 2011

CHINA DEBT THREAT

U.S. intelligence agencies are working on a major strategic assessment of the national security dangers posed by China’s large-scale holdings of U.S. debt, according to people close to the inquiry.

The assessment will include an examination of the impact of what has been called Beijing’s financial “nuclear option” — the calling in of its debt holdings as a way to punish the United States.

That option was discussed last year by Chinese military officials angered by continued U.S. arms sales to Taiwan. The threat was dismissed by a State Department spokesman as hollow because China would be harming its interests by the action.

A spokesman for the office of the director of national intelligence declined to comment.

Kandahar, Afghanistan, Gov. Tooryalai Wesa (center) looks over weapons discovered by Afghan security forces, who seized a car in the city loaded with explosives and weapons. (Kandahar Media Information Center via Associated Press)
Kandahar, Afghanistan, Gov. Tooryalai Wesa (center) looks over weapons discovered by Afghan ... more >

Word of the assessment comes amid reports that U.S. debt holdings by China are exploding.

Revised Treasury Department figures released earlier this week show that China’s debt holdings are nearly a third larger than originally known.

In June 2010, China’s estimated holdings of security assets were valued at $1.611 trillion. The holdings for June 2009 were $1.464 trillion.

Chinese Maj. Gen. Luo Yuan told state-run media a year ago, in response to U.S. arms sales to Taiwan, that China could attack “by oblique means and stealthy feints,” including “using economic means, such as dumping some U.S. government bonds.”

A State Department cable from Beijing in October 2008 also reveals a subtle Chinese government threat related to China’s U.S. debt holdings.

Liu Jiahua, deputy director of the Chinese State Administration of Foreign Exchange, told a U.S. official that “the recent U.S. announcement of another arms sale to Taiwan made it more difficult for the Chinese Government to explain its policies supportive of the U.S. to the Chinese public.”

Secretary of State Hillary Rodham Clinton, in another cable, was quoted as explaining the difficulty of pressing China’s communist government.

“How do you deal toughly with your banker?” she asked.

The Pentagon, too, is studying the possibility of economic warfare by China. It held a war game in 2009 involving financial weapons such as stocks, bonds, currencies and gold reserves, and reports of the exercise indicated that China won.

Paul Bracken, a Yale University professor who took part in the war game, said it was held because the Pentagon had a sense that “something important was going on that was being looked at in a narrow way by economists.”

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