China Can Take The Hit

The calls for broad retaliation over the planned US weapons sales to Taiwan came from officers at China's National Defence University and Academy of Military Sciences, interviewed by Outlook Weekly, a Chinese-language magazine published by the official Xinhua news agency.
The interviews with Major Generals Zhu Chenghu and Luo Yuan and Senior Colonel Ke Chunqiao appeared in the issue published on Monday, 8 February 2010.
The People's Liberation Army (PLA) plays no role in setting policy for China's foreign exchange holdings. Officials in charge of that area have given no sign of any moves to sell US Treasury bonds over the weapons sales, a move that could alarm markets and damage the value of China's own holdings.
While far from representing fixed government policy, the open demands for retaliation by the PLA officers underscored the domestic pressures on Beijing to deliver on its threats to punish the Obama administration over the arms sales.
"Our retaliation should not be restricted to merely military matters, and we should adopt a strategic package of counter-punches covering politics, military affairs, diplomacy and economics to treat both the symptoms and root cause of this disease," said Luo Yuan, a researcher at the Academy of Military Sciences.
"For example, we could sanction them using economic means, such as dumping some US government bonds," Luo said.
China has the world's biggest pile of foreign currency reserves, much of it held in US treasury debt. China held $798.9 billion in U.S. Treasuries at end-October.
But any attempt to use that stake against Washington would probably maul the value of China's own dollar-denominated assets.

China should take the loss on the US dollar holdings sooner rather than later.