Is China Preparing for War? by Mark W. Hughes
The Chinese central bank holds foreign currency reserves that have reached $819 billion, a foreign currency reserve second only to Japan and expected to exceed that nation's reserves this year. China has invested about three-quarters of this reserve in U.S. Treasury bills and other dollar-dominated assets. China's purchase of Treasury bills, in additions to similar purchasing by Japan and other nations (predominantly OPEC members) is responsible for much of the value of the U.S. dollar, and China uses the purchases to keep its own currency -- the yuan -- undervalued, thus maintaining a balance of trade that vastly favors cheap Chinese manufacturing goods. This also has the effect of holding U.S. interest rates at low levels, besides keeping the dollar at a high value worldwide. Chinese currency reserves are growing at an average rate of $15 billion each month.
However, China is now poised to move much of its currency reserves away from dollars and into other currencies, including the euro, and into commodities purchases -- predominantly oil. China's State Administration of Foreign Exchange has said they will "actively explore more efficient use of our foreign exchange reserves." This followed statements from one of China's central bank monetary policy committee's economist that "The general trend for the U.S. dollar is continually weakening." The economist, Yu Yongding, continued, "Countries with huge foreign-exchange reserves will have their assets shrunken." Finally, in July of 2005 China adjusted its own currency evaluation and increased the yuan by 2-percent against the dollar, and stated that rather than keeping with the system of the yuan's value automatically shifting in accord with the U.S. dollar, the yuan would now fluctuate based upon numerous other currencies such as the euro and the Japanese yen. These moves in China's economy could signal significant dangers to the U.S. economy. A decreased need for dollars in China, and an increased reliance on other currencies, the value of the dollar will plummet and interest rates will rise. A sell-off by China of U .S. Treasury bills will likewise cause the value of those dollar-dominated assets to plummet, and could trigger a sell-off by other nations including Japan and OPEC members. Iran and Venezuela, both OPEC members, began to shift large amounts of their central bank's reserve currencies away from dollars and into euros. Russia did the same. And the U.S. took notice. The current political conflict between Iran and We stern nations is also relevant. China has a $70 billion oil deal with Iran. It is possible that China has been reluctantly agreeing to the U.S. and European attempts to apply pressure to Iran, simply because it is obvious that most of Iran's animosity is directed at the two Western players. The goal here for China would be for Iran to follow a course leading to an embargo against the Western allies, and China could step into the vacuum and secure an even more lucrative deal with Iran to purchase almost all of the nation's oil exports. Iran looses nothing, they strike a blow at the West, and China benefits from that as well as from increased access to Iranian oil. These conditions could easily prompt states that traditionally side with and support the U.S. in the Middle East to abandon that role, so that Saudi Arabia and Kuwait see costly consequences from remaining too aligned with the U.S.
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