Beijing is “resolutely opposed” to the bill and threatens to “retaliate” without detailing how. China, the largest investor in US government debt, is sitting on a pile of sovereign bonds worth $847 billion as of July last. Also, China has the world's largest US dollar hoard estimated at around two trillion dollars. Theoretically, a large scale sale of US dollars by China in the international market has the capability of unsettling the whole US economy and with that the global trade and finance. Seemingly, China can launch a global war variant, potentially more devastating than the World War II, in international trade and financial terms, without firing a single bullet.

Will China or the US take the risk of triggering such a war ignoring its dreadful economic consequences? Almost certainly not. Such a step has potential to devastate both the economies. The rest of the world will suffer equally since the USA and China together account for over 50 per cent of the global economy in terms of international trade and global economic engagement such as movement of goods and services, finance, shipping and insurance. Yet, the indications are that China is seriously considering to spread its currency risk. The country plans to slowly unload its huge dollar reserves to buy gold, other precious metals and acquire scarce mineral assets across the world. The current gold price surge has a lot to do with the Chinese decision to invest about $80 billion in gold. This may be facilitated by the latest decision of the International Monetary Fund (IMF) to partly dilute its gold stock of some 200 tonnes to raise cash. The US treasury has the world's largest gold hoard at over 8,100 tonnes. As long as China adopts a gradual process to get rid off some of its dollar reserves, the American economy is unlikely to catch cold.

Ironically, China's huge dollar hoard, a result of its 30-year-old export-led economic growth strategy, is surging every year as Beijing lodges an annual trade surplus of around $350 billion. It runs large trade surpluses with almost all major economies in the world, including the European Union (Euro currency region), the UK, Japan and India. The trade surplus with the US alone is close to $250 billion. Compulsory export obligations forced on foreign direct investors in China in manufacturing and certain services, cheap labour, indirect subsidies to Chinese exporters, controlled freight rates, easy finance, inflation control and highly undervalued Yuan are among main contributors to China's phenomenal export growth over the years. On the other hand, imports are linked with the strengthening of domestic industrial and export infrastructure.

Export dumping has been most successfully practiced by China for many decades. Its membership with the World Trade Organisation (WTO) has had little influence over the way China conducts international commerce. The export industry has provided tens of millions of jobs to Chinese people. Indirectly, China is the world's largest exporter of labour. In recent years, the USA was upset by China's stubborn stand on its unilateral exchange rate fixation for Renminbi. China's other trade partners too are unhappy with the grossly undervalued RMB. The latter have so far avoided a direct confrontation with China on the issue since these countries are in better control of their trade deficit with China than the US is. These countries are watching eagerly at the Chinese response to the latest US pressure to get Yuan's rate corrected properly on a regular basis in keeping with the international trade and currency adjustment principles.

Like China's other global trade partners, India and the Indian industry too are watching with great interest if China bends on US pressure to correct the exchange rate of Yuan. Though on June 19, last, China announced to end Yuan's dollar peg, in practice, the Chinese currency's upward movement has been extremely slow. The Federation of Indian Chambers of Commerce and Industry (Ficci) views that a stronger Yuan will help make trade with China more desirably competitive. Cheap Chinese products are flooding the Indian market to a growing discomfort of India's both small and medium sector industries. Unable to face price competition, many Indian manufacturers have shut down their domestic production facilities to become peddlers of cheaper Chinese products. China is currently India's largest trade partner, overtaking the USA. The Sino-Indian bilateral trade is inching towards the US$ 100-billion mark. And, India is expected to suffer a trade deficit of close to $ 20 billion, this year.

India's imports from China range from heavy equipment, construction machinery, telecom equipment, consumer electronics and home appliances to various industrial and small-scale sector products. The only labour intensive item imported by China from India is iron ore. India also export to China some quantities of IT goods and services, pharmaceuticals and a small range of capital intensive products. Undervalued Yuan is pushing up India's trade gap with China in favour of that country. The exchange rate of India's non-convertible Rupee currency (INR), on the other hand, is adjusted against all global currencies on a daily basis by the country's Reserve Bank (RBI), the foreign exchange regulator. On October 7, 2010, INR exchange rate against US$ reached a two-year peak at Rs. 44.195 for a US dollar. It may be a very bad news for India's exporters, but that is life in India. India does not intervene in exchange rate fluctuation to protect INR or its foreign trade interest. The growing deficit trade with China is taking away millions of Indian jobs, especially in the small scale sector. Ficci and other apex business organizations in India are naturally worried. Even many western and Japanese companies operating in India are importing products from their China plants to sell in India to meet entry-level export obligations they undertook in China.

Curiously, China has rubbished the US claim that the undervalued Yuan is at the root of the huge US trade deficit with the communist giant and growing unemployment in America. It says the under performance of the US economy is due to poor savings habit of Americans. Domestic investment is low. Goods that China sells are no longer made in America. The US trade deficit with China has little to do with the value of Yuan, it argues. China may be partly right. In classical cases of import dumping over a period of time, domestic producers of countries which freely import such goods are totally priced out of the local market. The domestic market, then, becomes wholly dependent on imports, even at higher prices after a while since it takes time to rebuild industry from scratches, leave alone turning it globally competitive.

It is to be seen which way the Sino-American trade and currency war takes turn in the coming months. Even if China mends its ways, it may not immediately benefit countries such as the US, but China's new generation trade partners like India will certainly gain. However, China is unlikely to succumb to the US pressure in haste. It maintains a strong pro-China lobby among American businessmen, opinion leaders and the US Senate, which is yet to pass the House of Representative bill. The learning for the debt-strapped government of India is that the country can ignore the present Chinese trade dumping threat only to its own peril. (IPA Service)