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My Notes for My Segment on Today's Power Lunch -- CNBC

This is the sample Q&A I prepared for an appearance on CNBC in response to a report in the Daily Telegraph (England) that "The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation."
In the very first paragraph of your book The Coming China Wars, you describe a scenario in which global financial markets collapse after the Chinese start dumping U.S. bonds and dollars in retaliation for U.S. protectionism.  Do the Chinese really have such a nuclear option and wouldn’t this hurt the Chinese as much as the U.S.?
Yes, of course, they can go nuclear.  As part of its currency manipulation process, China has become America’s de facto central banker.  China has a trillion of our dollars and holds hundreds of billions of US government bonds.  If they start dumping those bonds – or even stop buying new ones – interest rates here in the US will spike, the dollar will plummet, and stock markets around the world will feel the pain.
How likely is it China will go nuclear?
The possibility is still remote but there is growing pressure both here in the U.S. and in Europe for China to let its currency float.  The Senate has the votes to pass a currency manipulation bill and France’s new prime minister is making noises in the EU to crack down on China because of its effects on the euro.  On top of this, there is a growing consensus that China’s efforts to maintain its fixed peg are overheating the Chinese economy.  It’s a dangerous time.
But what about the point that this would hurt China as much or even more than the U.S.?
There is a difference between threatening to go nuclear and going nuclear.   China saying it might stop financing our deficits and throwing a little scare into the markets is a strategic way of reminding American politicians that China is holding all the trump cards.
That said, if China feel like its back is against the wall, many Chinese leaders fully believe that the Chinese can withstand hard economic times a lot better than our fat, dumb, and happy SUV-driving coddled Americans.  They may be right – but it’s a dangerous game that could destabilize China and threaten the Communist Party.
How can this nuclear option be avoided?
I’ve said for over a year now that China has a wonderful opportunity to unilaterally announce a stable campaign to float its currency over a two- to three-year period.  That would be enough time to let markets adjust and it would stop US protectionist sentiment in its tracks.  It would be a great political and economic coup for China But there is a very stupid and stubborn streak in a segment of the Chinese leadership that doesn’t want to be dictated to no matter how sensible the monetary policy might be.  Let’s hope reason will prevail.