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China’s Economic Nuclear Option

There has been talk of China using it’s economic “nuclear option” against the US, that is dumping its US dollar holdings, thus killing the value of the dollar against other currencies, as for example in this report. But this would be sort of mutually assured destruction, a MAD economic doctrine. The US would be hurt, but so would China. It would lose its best customer, the US, which would no longer be able to afford all the stuff it now imports. Plus, it would be hard for China to dispose of all of its US dollar denominated assets before the dollar started to crash; so, China would take a big loss on whatever it got caught holding as the dollar tanked. In addition, as the article points out, the US has been trying to get China to increase the value of the yuan relative to the dollar, albeit not by so much; so, China would be to some extent doing what the US wants it to do, delink the yuan from the dollar and let the yuan float up versus the dollar.

In short, this seems like something that it would be very unlikely for China to do. It would hurt the US, but at a great price for China. The only scenario might be if there was a huge financial crash in China, so that adding to it would be relatively unnoticeable; then China might say, “If I’m going down, I’ll take America with me.”

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