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Thursday, November 08, 2007

Did China just fire a warning shot at the Fed?

Source: MarketWatch
LONDON (MarketWatch) -- The full faith and credit of the United States are under a lot of stress these days, so much so that the public comments of an obscure Chinese official -- obscure to most Americans, at least -- are enough to spark big jumps in commodities, and equally big slides in stocks and the dollar to boot.
Cheng Siwei, vice chairman of the standing committee of the National People's Congress, reportedly suggested Wednesday that China might need to diversify its $1 trillion-plus holdings of foreign reserves because of the precipitous slide in the value of the dollar.
It's hard to know what Siwei, a UCLA-educated economist, hoped to accomplish by choosing this particular juncture to make his comments. Perhaps it was just an innocent academic observation on the rapid decline of the U.S. currency and the fact that any entity stuck holding huge levels of dollars would have to rethink their approach in such circumstances.
However, Siwei's position and previous history suggest otherwise. After all, his comments about the dubious quality of equities on the Shanghai Stock Exchange earlier this year helped spark a temporary swoon that hit U.S. markets at the end of February.
So a more realistic reading, perhaps, is that China wanted to send a warning shot across the bow of the Federal Reserve. The message: the U.S. central bank shouldn't think about cutting interest rates again. In a sense, it's a game of economic "chicken" played on a geopolitical scale.
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