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China issues subtle threat to U.S.

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 STORY

Kai Ryssdal: The president stopped in for a chat about the economy with Treasury Secretary Henry Paulson today. He talked tough about how Congressional Democrats like to spend money too much and how strong the economy is.

He was asked about China, and whether or not we're headed for a trade war with Beijing. "No" was the answer. But the Chinese government's been taking heat from two branches of the U.S. government lately. Congress and the Treasury Secretary like to talk about the value of China's currency, the Yuan. And how it's too low, which hurts American exporters and drives up the trade gap.

Congress has been quite vocal about trade sanctions. And now, two lower-level Chinese officials have begun firing back a bit. They're saying their bank-full of American Treasury note could be a useful "bargaining chip" if push comes to shove. Marketplace's Steve Tripoli explains.


Steve Tripoli: China holds a trillion-plus dollars worth of Treasury bonds. The not-so-subtle threat is to sell off some of those bonds, which could spark a run on the dollar and trigger a recession here.

It was made by two officials at some distance from China's leadership. But little is said publicly in China without at least tacit approval.

Simon Derrick: It's a tester, if you like, to see how the U.S. reacts to this kind of pressure.

Simon Derrick's a currency strategist at Bank of New York Mellon. He says the Chinese are just dishing back a little of what they've been receiving.

Derrick: I think that this is a very direct reaction to the increased pressure from Congress, if you like.

Congress has been threatening trade sanctions if the Yuan's value doesn't rise.

Adam Segal's a China expert at the Council on Foreign Relations. He doesn't think either side is about to deliver on their threats.

Adam Segal: You know, the way that I often describe it is we both kind of have our hands around each other's necks, and we're going over a waterfall.

Segal says the Chinese would shoot themselves in the foot if they started dumping some of their U.S. bonds.

Segal: Once they start selling off then of course the dollar drops, and they have to worry about a stampede and still holding onto the assets.

But Segal says American sanction threats ring a bit hollow as well.

Segal: It's incredibly hard to figure out what we're gonna do without either hurting U.S. consumers or U.S. businesses in some way.

China acknowledges it needs to work on the Yuan's value — eventually. And Americans admit they need to scale back on imports and deficit spending.

But the mutual pressures these days are making for a prickly relationship. And China's recent jaw-boning seems to signal that it, too, has ways — more than a trillion of them — to get as prickly as Americans choose to be.

I'm Steve Tripoli for Marketplace.

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