China sig­nals dol­lar swap; Dow plunges 360 points

The Washington Times Weekly - - National - By Pa­trice Hill

China roiled fi­nan­cial mar­kets around the globe on Nov. 7 when it as­serted that the dol­lar is los­ing its lus­ter as the world’s re­serve cur­rency and that Bei­jing will swap some of its $1.4 tril­lion in re­serves out of U.S. dol­lars and into stronger cur­ren­cies like the euro and Cana­dian dol­lar.

China’s ver­bal as­sault on the dol­lar helped trig­ger a 360-point plunge in the Dow Jones In­dustr ial Av­er­age and came as French Pres­i­dent Ni­co­las Sarkozy warned in a speech to the U.S. Congress that the “dis­ar­ray” caused by the dol­lar’s steep fall could lead to “eco­nomic war.”

“The world’s cur­rency struc­ture has changed,” Xu Jian, a cen­tral bank vice di­rec­tor, said in a Bei­jing con­fer­ence, ac­cord­ing to wire ser­vice re­ports. The dol­lar is “los­ing its sta­tus as the world cur­rency,” he said.

“We will fa­vor stronger cur­ren­cies over weaker ones, and will read­just ac­cord­ingly,” Cheng Si­wei, vice chair­man of China’s Na­tional Peo­ple’s Congress, said at the same meet­ing.

A spokes­woman for Trea­sury Sec­re­tary Henry M. Paul­son Jr. said he re­mains “strongly com­mit­ted to a strong dol­lar,” but the Bush ad­min­is­tra­tion has done noth­ing to pre­vent the cur­renc y’s re­cent sharp drop against other ma­jor cur­ren­cies.

Some an­a­lysts dis­missed the Chi­nese of­fi­cials’ state­ments as blus­ter, but the news left the green­back at a record low near $1.50 to the euro in New York trad­ing, the low­est level in 57 years against the Cana­dian dol­lar, and the low­est lev­els in a gen­er­a­tion against the Bri­tish pound and other cur­ren­cies.

The dol­lar’s plight added to a raft of woes on Wall Street, where the Dow and other U.S. stock in­dexes lost 2.7 per­cent or more of their value amid wor­ries that the weak­en­ing dol­lar is trig­ger­ing an in­fla­tion­ary spi­ral in oil and other com­mod­ity prices, while mak­ing U.S. stocks, bonds and other in­vest­ments less at­trac­tive to for­eign­ers.

“The big is­sue on any cur­rency is if its rate of de­pre­ci­a­tion is so fast that it scares away all cap­i­tal, and the an­nounce­ment that we heard from China sort of feeds those fears,” said Larry Smith, chief in­vest­ment of­fi­cer at Third Wave Global In­vestors.

With the world’s largest re- ser ves of dol­lars, China has been a ma­jor in­vestor in U.S. Trea­sury bonds and debt se­cu­ri­ties and is the sec­ond-largest holder of U.S. gov­ern­ment debt next to Ja­pan. China ac­cu­mu­lates a lot of dol­lars be­cause of its lop­sided trade sur­pluses with the United States and its pol­icy of link­ing its cur­rency to the dol­lar, which re­quires it to buy and hold dol­lars.

While China has been sig­nal­ing all year that it will grad­u­ally change its poli­cies, the blunt and un­am­bigu­ous state­ments re­ported Nov. 7 star­tled mar­kets.

China al­ready has di­vested about 5 per­cent of its $400 bil­lion of Trea­sury hold­ings and has set up a $200 bil­lion in­vest­ment fund to di­ver­sify its in­vest­ments by pur­chas­ing stocks and eq­uity own­er­ship po­si­tions in com­pa­nies around the world. The gov­ern­ment plans to de­vote more of its re­serves to such al­ter­na­tive in­vest­ments.

Chi­nese of­fi­cials told re­porters at the Bei­jing con­fer­ence that they are not sig­nal­ing China will dump dol­lars and buy euros. But since China con­tin­ues to fix its cur­rency against the dol­lar, the prac­ti­cal ef­fect of Bei­jing’s moves away from the dol­lar is to force up the value of the euro and other cur­ren­cies that float freely against the U.S. cur­rency, an­a­lysts say.

China’s poli­cies have helped feed a gi­gan­tic run-up of the euro — the Euro­pean cur­rency has gained nearly two-thirds against the dol­lar since 2001 — which Euro­pean lead­ers say is hurt­ing ex­ports and eco­nomic growth on the con­ti­nent. They have pleaded with the Bush ad­min­is­tra­tion to do some­thing about the wild cur­rency swings, and Mr. Sarkozy made his case per­son­ally in Wash­ing­ton on Nov. 7.

“Those who ad­mire the na­tion that has built the world’s great­est econ­omy and has never ceased try­ing to per­suade the world of the ad­van­tages of free trade ex­pect her to be the first to pro­mote fair ex­change rates,” Mr. Sarkozy said in his con­gres­sional ad­dress, al­lud­ing to the pos­si­bil­ity of eco­nomic re­tal­i­a­tion by Euro­pean states stung by the fall­ing dol­lar.

The French pres­i­dent also blamed China for un­fairly un­der­valu­ing its cur­rency, but he said that is no ex­cuse for the U.S. fail­ing to act. The Bush ad­min­is­tra­tion has been adamant that cur­ren­cies should be al­lowed to float freely.

“The dol­lar can­not re­main ‘some­one else’s prob­lem,’ ” Mr. Sarkozy said. “If we are not care­ful, mone­tar y dis­ar­ray could morph into eco­nomic war. We would all be its vic­tims.”

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