NEW YORK (Reuters) – US intelligence officials and top academics last week debated the risk China could wield its massive US debt holdings as a weapon aimed at influencing US foreign policy, according to a person who attended the meeting.
At a National Intelligence Council meeting last week, held at a Washington, DC hotel, members of US intelligence agencies and China watchers discussed potential outcomes if China chose to sell its $900 billion of US Treasury bond holdings, pushing up interest rates and making life much tougher for US businesses and consumers.
While considered a remote possibility, China’s tremendous economic stranglehold over the United States remains much-debated as the world’s third largest economy grows in leaps and bounds and the number one economy struggles to break free from a deep recession.
The meeting took place as the United States prepares to issue a report that could label China a currency manipulator. US lawmakers are also arguing over a bill that would penalize China for any protectionist policies.
“The best offence is often a good defence and you must be prepared. This is something that allows the US to consider what policy alternatives they might have when facing threats from the outside,” said Paul Markowski, president of the Global Strategies-Analysis Group in New York.
“This is one of the government bodies that considers the risks to the United States, economically, geopolitically and militarily,” he added.
The NIC is a think tank made up of academics and members of the US intelligence community. Its website describes itself as an advisory council to senior policymakers and the President.
Some policymakers think China could exercise this power over the United States without mobilizing any military force to influence US policy in areas — from Taiwan to climate change — where it has deep interests.
“This is obviously considered important,” said the person who attended the meeting. “It’s been an ongoing topic of conversation since the Chinese started amassing large sums of dollars.”
A banker at a primary dealer, one of the 18 financial firms authorized to deal directly with the Treasury Department to buy and sell US government debt, said the timing of the discussion seemed practical.
“I’m guessing the following: Maybe the US is preparing itself that in the event the Treasury, for example, were to name China as a currency manipulator or Congress were to pass legislation that viewed China as protectionist, this could be how China would respond,” said the banker, who did not wish to be named. “So as a way of brainstorming you would want to come up with what you would do.”
The Chinese government last Saturday announced it would make its currency more flexible, loosening its peg to the US dollar. But financial analysts and lawmakers alike said the change might be too gradual—or it might not occur at all.