The past week has been an interesting time in the ongoing debate about the value of China's currency, the Yuan Renminbi. The debate is growing more shrill. With the increase of emotions, logic and reason seem to be taking a vacation...

A British paper, the Telegraph, published an article last Thursday about how China was threatening to "crash" the US Dollar. China has a lot of US Treasury bonds saved up - something in the $900 billion range. If it were to liquidate a bunch of them at once the US Dollar's exchange rate value would likely go down - maybe a lot. The writer at the Telegraph suggested that the change in the US bond market that would result from such an action would in turn affect the US housing market and probably lead to a recession in America. Where is the Telegraph getting the idea that any of this could actually happen? Low level Chinese officials at academic institutions and/or "think tanks" in China have suggested it in media interviews. Historically, according to the Telegraph, policy ideas get floated there first...

Almost as soon as the Telegraph's article had been published, Richard Brubaker commented on it at his blog, All Roads Lead to China. I liked what he had to say: "This article and others like it are inflammatory, assuming a lot, meant to sub salt in open sores, and are generally something I would dismiss as just another ad generator (China bashing is popular)..." I knew he was right, but I didn't really think much at the time about why...

I think I read Richard's blog on Friday and followed his link to the article in the Telegraph. It wasn't long before the Associated Press was carrying reports from the Chinese news agency, Xinhua, that in turn quoted officials at the People's Bank of China saying that US currency and Treasury bonds were important assets to the Chinese government and that they weren't really thinking of getting rid of them. I had to wonder myself how much of the story was just news agencies stirring the pot to attract readers - news making news.

I came across an article today that added some perspective to the issue. The piece was published by the Robert H. Smith School of Business at the University of Maryland. A faculty member there, Dr. Peter Morici (Professor of International Business), had this to say:

If the peoples Bank of China were to sell enough Treasury securities to disrupt financial markets and cast the U.S. economy into recession, where would China's factories sell all their stuff? Where would all those Chinese living in cities work if their stuff does not move? What would they do with their time if they were laid off? Oust their government? Riot in the streets? The Chinese Communist Party can make effective threats to disrupt the U.S. economy only if Americans are stupid enough to panic.

Dr. Morici also pointed out that China is just as much "a hostage" to the trade imbalance situation as America is. With Congress rattling the saber of trade sanctions against China over the value of the Yuan, it's sometimes easy to miss the fact that the Chinese government has a vested interest in the welfare of the American economy. If America stops buying all the stuff that China makes, that could have an impact on the stability of China...