United States may have to pay price for Beijing intervention

BEIJING, Oct. 9 – Banking sources in China have indicated to China Briefing News today that Beijing is likely to purchase still more U.S. debt to support the dollar and to help avert a U.S. and possible global downturn.

China already holds approximately some US$1.27 trillion in U.S. foreign exchange reserves. However, as the value of the greenback has fallen, pressure has mounted to sell and use that money to bail out China’s own domestic economy. But with the mainland looking increasingly isolated from the global credit crisis, it is in Chinese interests to support the dollar and see the value of these reserves rise.

Academics advising the Chinese government on its foreign exchange management have described the U.S. dollars China holds as “having been taken hostage” by financial mismanagement not of China’s own making, and there is considerable anger in China’s financial industry that the United States let this situation get to such a stage. However, if China does step into the breach and declare support for the dollar, it will impact globally on the current situation and also place Beijing in a position of improved stature amongst the international business community over its perhaps better perception of prudent fiscal management.

For China to do so however, pressure will be put on Washington in two ways: a request to stop the sale of US$6.5 billion worth of weapons to Taiwan, announced by the Pentagon last week, which has immensely upset the Chinese leadership; and guarantees over better market access to Chinese businesses in the United States.

China essentially has to act, its exports show signs of weakening and optimism amongst Chinese purchasing managers “was not high.” However, the nation also has considerable scope for maneuver concerning its domestic financial position and is able to act in a number of ways to prevent the Chinese economy slowing.

China cut its own interest rates yesterday and may do so again in efforts to stimulate the domestic economy further to take up slack from weakening exports. Politically China has much to gain in international fiscal credibility by acting to support the dollar. The question is when. And that will require some eating of humble pie from the U.S. side to attract China into the game sooner rather than later and get quickly behind the faltering U.S. economy. China, on the other hand, can afford the luxury of waiting awhile.

In related news, China Merchants Bank opened a new branch in Wall Street yesterday and has begun wholesale deposit-taking, lending, trade finance and other services in New York City.