Fed up with American demands that it let its currency rise, and congressional threats of tariffs if it does not, China last week issued a threat of its own. Beijing rolled out its “nuclear option.”

Two Chinese financial experts close to the regime issued a pointed warning. If the Americans don’t get off our case about revaluing the renminbi, and if Congress keeps threatening tariffs, China may just dump a huge hoard of U.S. Treasury bonds and T-bills onto the world market and cause a worldwide run on the dollar.

Were China to engage in a dump of dollar assets, there might well be global abandonment of U.S. debt, forcing the Fed to hike interest rates to protect the U.S. currency. Should that happen, the housing market would freeze up and the economy head due south. The 10 percent drop in the Dow of recent weeks would then be but a sip of the awful drink that would follow.

China is bluffing, it is said. China would never do this.


Why not? Because the Chinese hold $900 billion in U.S. bonds and T-bills, the bulk of their $1.33 trillion in currency reserves. To dump U.S. bonds would shrink the value of China’s remaining dollar assets. Why would China deliberately imperil the value of the largest cash hoard it has?

Moreover, such an unfriendly act would lead to American retaliation in the form of Smoot-Hawley tariffs on Chinese goods, which would not only bring Beijing’s economic growth to a screeching halt but stop cold the flow of U.S. jobs, factories, and technology into the Middle Kingdom.

Thus China’s exercise of the nuclear option will not happen, for it means mutual assured destruction. And China would not be so insane as to destroy a global trading system from which it has profited more than any other nation.

After leaving the threat on the table for days, to concentrate the mind of the Americans, China’s central bank issued a soothing reassurance, telling the world—and Washington—that it has no desire to dump its dollar assets and believes the dollar has a crucial role to play.

But as was intended, the exercise was instructive. What Beijing has said is: Don’t mess with us. Don’t talk tough to us. Don’t try to force us to revalue. And don’t threaten us with tariffs, because we can do greater damage to you than you can to us, because we are now your bankers.

Welcome to the Global Economy, where American prosperity is hostage to the Marxist mandarins of Beijing, who now have the power to sink the dollar and throw the U.S. economy into freefall.

This raises several questions. Who told us most favored nation status for China was a marvelous idea—for America? Who put this independent Republic into a situation where its financial leadership of the world, its currency, and its prosperity now depend on the indulgence of the sons of Mao Zedong? How do we get out of this box? For our dependence on China is not shrinking, it is growing. America borrows $2 billion each day to finance our trade deficit and $5 billion a week to finance that part of the mammoth U.S. trade deficit that is with China.

China’s stash of Treasury bonds and T-bills is steadily expanding, and one day, Beijing is going to say: We have enough of these. We don’t want any more U.S. government debt that pays a paltry 5 percent. We want to buy high-tech U.S. corporate assets in the open market.

That day is approaching, for in the Bush years the dollar has steadily fallen against gold, against oil, against the euro, against the Canadian dollar, and, since June, against the yen. And OPEC nations, like China, want to diversify their reserves and shift hard currency into “sovereign wealth funds,” both for a higher rate of return and to buy assets of more enduring value than U.S. government debt.

As Herb Stein, Richard Nixon’s economic adviser, declared in “Stein’s Law,” “If something cannot go on forever, it will stop.”

America faces an awful dilemma. If we try to force a rise in the Chinese currency, China may sink the dollar. But if we stay on this course, China’s trade surplus will continue to rise. U.S. factories, jobs, and capital will continue to leave our shores for China. The dollar will continue to sink. America will grow more dependent, while our capacity to buy from the rest of the world will diminish.

Today, our growth is not only beneath that of Europe, it was but one-half of 1 percent in the first quarter. China’s growth reached 12 percent in the second. Autocratic capitalism is leaving democratic capitalism in the dirt.

Wrote the poet Oliver Goldsmith, “Ill fares the land, to hastening ills a prey / Where wealth accumulates, and men decay.” His poem was titled “The Deserted Village.”