China won't torpedo the economy by dumping our bonds.

Why Beijing Wants a Strong Dollar

By ZACHARY KARABELL

Twenty years ago, in the wake of the suppression of the student movement that had taken over Tiananmen Square, it seemed as if China's brief opening to the world had come to an end. In fact, 1989 marked the beginning of China's supercharged path to economic reform. The results have been tremendous: China is now the second pillar of the global economy and is increasingly vital given the vulnerability of the United States.

The U.S. now relies on China for credit, a fact that is generating considerable anxiety in Washington and Beijing. Last month Chinese Premier Wen Jiabao called for more international oversight of the world's major "reserve" currencies. While he didn't specifically mention the U.S. dollar, the message was clear. As the largest holder of U.S. debt, the Chinese government is restless as the $2 trillion in foreign reserves it holds fluctuates primarily based on the management -- or mismanagement -- of American financial institutions.

Mr. Wen's comments, as well as more recent statements by other Chinese officials, constitute a series of not-so-subtle hints by China that it intends to take a more active approach toward its substantial investments in the U.S. Given that China is now the largest holder of U.S. Treasurys and the largest foreign creditor of the U.S. government -- to the tune of approximately $1 trillion in government securities alone -- the recent statements by Chinese officials have caused serious American trepidation.

Unease about China's economic clout is not new. During his presidential campaign in 2004, John Kerry waged a rhetorical assault on the "Benedict Arnold CEOs" who outsourced their company's workforce to China. In 2007, Sens. Charles Schumer of New York and Lindsey Graham of South Carolina found common ground in threatening China with punitive tariffs because of accusations of currency manipulation that gave it an unfair trade advantage. The current financial crisis has accelerated such concerns, even as China's willingness to purchase U.S. debt has allowed the Obama administration to commit to unprecedented levels of spending.
Read entire article :