China Gives Pass To Congress

China recently passed up a "golden" opportunity to browbeat the US Congress in to reigning in federal spending and in effect stop forcing the Federal Reserve to monetize the US debt.

"China on Wednesday ruled out the "nuclear" option of dumping its vast holdings of U.S. Treasury securities but called on Washington to be a responsible guardian of the dollar.

In the third in a series of statements explaining its work to the Chinese public, the State Administration of Foreign Exchange sought to allay concerns in the outside world that arise whenever Beijing shifts its holdings of U.S. government debt.

"Any increase or decrease in our holdings of U.S. Treasuries is a normal investment operation," SAFE, the arm of the central bank that manages China's official currency reserves, said.

It said it constantly adjusts its portfolio to maximimise returns, and any changes to its U.S. Treasury portfolio should be seen in that light and not interpreted politically.

In a series of questions and answers posted on its website, www.safe.gov.cn, SAFE asked rhetorically whether China would use its $2.45 trillion stockpile of reserves, the world's largest, as a "nuclear weapon".

SAFE said such concerns were completely unwarranted."

Exercising the "nuclear option" would probably do as much harm to China, at least in the short term, as it would to the US. That is because selling its enormous reserve of US Treasuries would flood the market, causing their overall value to plummet.

However, a plummeting value ultimately to zero is the long-term fate of US Treasuries anyway.

As a result, China would have been better served demanding that Congress get its fiscal house in order and stop running budget deficits, so as to protect its investment in the Treasuries that it currently holds.