US might pitted against China's hoard of treasury bonds

 

After accumulating a huge chunk of US treasury bonds, China has roped in an American icon - the leviathan petrol-guzzling Humvee SUV.

Like the Harley-Davidson, the Hummer, as it is fondly known, is a symbol of the US' spirit of freedom, roaming its freeways and back roads like no other SUVs can.

It is an SUV that feels at home whether in the battlefields of Iraq and Afghanistan or cruising along Hollywood's Rodeo Drive or Manhattan's Fifth Avenue.

It used to belong to the General Motors stable, another US icon now reeling under the tremendous weight of the global economic crisis.

Now, who would have thought the Hummer would one day be owned by the Chinese, who have been constantly rediculed for their knack of copying and selling cheap almost anything from a remote-controlled helicopter to a Rolls-Royce limousine.

I think everybody should stop ridiculing China. Not only because it has decided to just buy the Humvee business instead of copying the SUV, but more so because the world's most powerful nation is now financially beholden to it through its big holdings of US treasury bonds.

As at the first quarter of this year, China had an estimated US$800 billion (RM2.8 trillion) worth of US treasury bonds, second perhaps only to Japan.

A few months ago, there was concern at the Pentagon of the supposedly rapid build-up of the Chinese Navy.

Defence analysts in the US were quick to paint a scenario in which China flexes its military muscle against US interests around the world. More so because China is also a member of the elite nuclear weapons club.

Oh, please. If it wants to, China does not have to fire a single bullet to shake the US up. It has an equally powerful item in its arsenal now.

All it has to do is dump all the US bonds in its possession and, while no one has attempted to predict what exactly will happen to the US economy, one thing is sure - US interest rates will probably shoot through the roof and a negative chain reaction will be felt throughout its real economy.

But China probably won't do that. Over the years, despite various analyses done by all sorts of experts on its policy, China has not displayed any signs of adopting an expansionary policy.

Rather, it has kept itself busy with things like turning places such as Shanghai into a modern metropolis, successfully hosting the last Olympics, building the world's largest dam, opening up new markets for Chinese businesses, and, yes, buying up US bonds.

And I have a feeling that it is now busy eyeing several more distressed US and European companies.