Inside the Ring: New WMD threats

The report concludes that economic vitality is key to U.S. national security; but, with the global economy, the country is facing significant vulnerabilities.

The report urged the U.S. government to develop a national strategy and capability to defend the U.S. economy from every form of economic attack.

The September report, “Weapons of Mass Destruction: An Evolving Threat,” was produced by contractor Universal Strategy Group, Inc., for the undersecretary of defense for intelligence and its Combating Terrorism Support Office.

Pentagon on Financial threat

Chinese military and Communist Party officials have threatened to “dump” some of China’s holding of $1.17 trillion in U.S. Treasury securities to punish the United States and wage financial war in response to arms sales to Taiwan, according to a Pentagon report to Congress.

The July report plays down the prospect of what has been termed the financial “nuclear option” by Beijing against the United States.

“Attempting to use U.S. Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the United States,” says the five-page report entitled, “Assessment of the National Security Risks Posed to the United States as a Result of the U.S. Federal Debt Owed to China as a Creditor of the U.S. Government.”

“As the threat is not credible and the effect would be limited even if carried out, it does not offer China deterrence options, whether in the diplomatic, military, or economic realms, and this would remain true both in peacetime and in scenarios of crisis or war.”

If China sold off its U.S. debt holdings suddenly and significantly, short-term disruptions in markets would result, along with an increase in the interest rate for Treasury securities.

However, the report said doing so would impose significant costs on China, such as causing direct financial losses because of the fall in value of China’s holdings. It would also call into question China’s participation as a “reliable and respected economic and financial partner.”

The report said that in 2010 Chinese Gens. Luo Yuan and Zhu Chenghu and Col. Ke Chunxiao urged China to sell off U.S. debt holdings in response to the latest announced arms sale to Taiwan, which China opposes as undermining its effort to reunite the island nation with the mainland. It also quoted Ding Ging, editor of a state-run news outlet, as saying China should “use its financial weapon to teach the United States a lesson if it moves forward with a plan to [sell] arms to Taiwan.”

China so far has not acted on the plans, and China has continued to buy large quantities of U.S. Treasury securities, which Beijing sees as a safe place to park its money, said the report written to comply with recent congressional legislation.

Mr. Freeman, the financial security specialist, took issue with the report. He said that former Treasury Secretary Henry Paulson revealed in a 2010 book that Russia dumped American bonds in 2008 and urged the Chinese to do the same.

“The Chinese did not at that time but this does not mean they won’t,” Mr. Freeman said in an email.

He said the Pentagon report was “naive” and provided a “politically correct answer” that failed to address what he said were very real risks from Chinese financial warfare.

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