to find out it's no story at all.

thanks for giving that lunatic some press.

re: "...if the value of the dollar dropped, so would the value of China's remaining dollar-denominated assets."

Not so.

As the article points out: "It would also cause a spike in US bond yields...It is estimated that China holds over $900bn in a mix of US bonds.

Fact is, China owns us.

Excerpt from The Invisible Hand (of the U.S. Government) in Financial Markets by Robert Bell

In effect, the basic racket is: the Bush administration exports jobs to [China], and in turn they finance Bush’s fiscal deficit so he can continue his wars and cut taxes for his friends. For the Chinese, the basic racket is too delicious and too ironical. They industrialize their country at the expense of the de-industrialization of the U.S. Not only is it sweet revenge for more than a hundred years of humiliation at the hands of Europeans and Americans, but also at the end they are relatively strong and the U.S. is relatively not. What do they care if the deal isn’t quite as good as it would be in a perfect world and they lose a third, half, two-thirds of their savings in U.S. Treasuries? Besides, in an even mildly less imperfect world, the U.S. President would not make such a blatantly corrupt bargain against the people of the U.S. Billionaire investor Warren Buffett calls this system of indebting U.S. citizens to foreign governments “a sharecropper’s society,” to distinguish it from Bush’s supposed “ownership society.”

http://www.financialsense.com/editorials/reality/2005/0403.html

Given the source explained in the introduction, I sincerely doubt that the rest of the story is worth reading let alone considering. When someone who is credible says that China is going to dump dollars, then it's time to get worried.

re: "...if the value of the dollar dropped, so would the value of China's remaining dollar-denominated assets."

Not so.

As the article points out: "It would also cause a spike in US bond yields...It is estimated that China holds over $900bn in a mix of US bonds.

You're mistaken. The spike in bond yields doesn't do anything at all to help China's current bond assets.

If China started selling US T-bills en masse, the value of those bonds would drop dramatically. If you were to buy one of those from them on the cheap, you would get a very high yield, because you bought for such a low price. But the high yield that you get doesn't help China at all.

Perhaps I'm not looking at this right, but it seems to me that:

1) China stands to lose a lot of money if it dumps its dollars

2) China has a lot of money aside from it's U.S. assets

3) China has a largely centrally-managed economy

4) China has been actively pursuing other trading partners besides the U.S. in recent years

5) The U.S. does not have a centrally-managed economy, and is subject to the whims and (more important to this story) the fears of its investors

6) The U.S. depends on China for WAY too much of its own economy

Add it up, and I think, even if China loses $500 billion or so in the deal, the U.S. loses a LOT more, and China comes out very much the victor. It's a calculated loss, and one they just might choose to take. If they start dumping dollars, the U.S. markets will freak out and lose way more value than the Chinese economy loses (since the Chinese gov't can control their markets more than the U.S. can). Face it, China holds more cards than we do. We can't run our economy without Chinese factories. America can't make microchips or televisions or bicycles anymore - we don't have those factories. We probably can't produce enough raw materials (steel, etc) to keep the factories we do have running, so if China wants to play hard, we're going to be the ones who get bloodied.

And they don't even have to go at us hard to make the point. They dump a few assets, the dollar loses value and the Dow and NASDAQ each drop five or six percent in a day, we get the message and back off. All it costs China is a couple hundred million dollars (they have plenty more in the bank thanks to the trade imbalance), and the U.S. government never mentions the yuan again (especially if such a move were timed to coincide with an election cycle - nobody wants to campaign for re-election during an economic downturn). It would be a smart move - using our system's own weaknesses against us.

If I'm wrong on this, please correct me, as this isn't the sort of thing I actually want to be correct about...

As I am writing this comment, I am listening to my DVD "12 Girls Band Live from Shanghai". For years, the Chinese having been making my shoes (Rockport Pro-Walkers), many of my hi-tech gadgets, a lot of my tools, etc. Now they are starting to provide some of my entertainment. When it is in their interest, they will stop supporting the US$ by terminating their purchase of US government bonds. Let's face it, US bonds have been a lousy investment for foreign central banks in recent years. The US government will then get what it wants, namely, a higher valued yuan, but it may not like the collateral damage. If my Rockports go from $40 to $80 or $100, I will not be a happy camper, and neither will millions of other middle class American voters, who shop at Walmart, Sam's Club and Costco. The US inflation rate would be horrible, especially for average consumers. Without buying by the Chinese Central bank, 10 year US Treasuries could easily go back to 8%, which, as I recall, they were at in the late 1970's. If we are really unlucky, they could go to 15%, which is where they were around 1982. That would certainly tank the US housing market for years to come, along with the stock market. A 4.5% dividend on bank stocks won't look so good if 10 year Treasuries are paying 15%.

So lets all be nice to the Chinese. I want those cheap Rockports. We can't all be rich hedge fund traders and shop at Saks Fifth Avenue.