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China bares its teeth

Customers stand in front of a currency exchange rate displayed at a luxury hotel in Zhengzhou. U.S. Treasury chief Henry Paulson has voiced his opposition to a bill that would enable Washington to punish China for its weak currency.

TEXT OF INTERVIEW

Doug Krizner: During last night's debate among democratic presidential contenders, candidates were asked whether China is an adversary or ally. Conventional wisdom says China deliberately undervalues its currency to make Chinese exports cheaper in the U.S. It's a move that's helped to give the U.S. a $233 billion annual trade deficit with China. The Senate's been inspired to propose punishing the Chinese with trade sanctions, and it's a threat the Chinese are not taking lightly. London's Daily Telegraph is reporting the Chinese government is willing to use its investment in U.S. treasury bonds as a political weapon against Congress. The Chinese hold roughly $900 billion in U.S. government debt. Let's bring in Ambrose Evans-Prichard. He's business correspondent with the Daily Telegraph in London. Ambrose is this more than tough talk, could the Chinese actually dump treasuries?

Ambrose Evans-Prichard: Well, firstly since they hold roughly $900 billion of their own money in U.S. bonds of different kinds, if they triggered a further fall in the dollar, then of course they would damage their own interests. But they're getting quite annoyed. They feel they're being singled out for punitive treatment by the United States, and so they're sort of retaliating in the way that's easiest at hand.

Krizner: Ambrose, what do you think about the timing of this threat?

Evans-Prichard: Well I think two things are going on here in terms of timing: a) you know, Capitol Hill is preparing to act on this, on the Chinese currency in the next few weeks and months, and b) the Chinese know they have maximum leverage at this point because the U.S. right now is in no state to endure a sharp rise in bond yields. If bond yields spike again then obviously it would send the housing market into a second sharp downward leg and probably tip the U.S. economy into a recession. So they know they have that leverage, so to some degree they're playing games here. They're knowing they've got the United States by the throat at this moment and this is a warning to Capitol Hill saying 'you play rough with us, we'll play rough with you and we have the power to retaliate.'

Krizner: Ambrose Evans-Prichard is a business correspondent for the Daily Telegraph in London. Ambrose, always a pleasure, thanks so much.

Evans-Prichard: Thanks, bye.

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