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[sojourner]

RT: A thought puzzle, indeed. China is burdened by curse of riches, a curse compounded by riches denominated in USD. Per recent data, China holds astonishing US$1.905 trillion equivalent (Sept 2008) in foreign reserves. As you say, about US$1.3 trillion reportedly resides as dollar-denominated U.S. Treasury debt instruments (see link below), linchpin of a devil's bargain to finance U.S. government and consumer overspending in order to grow China's production engine and enrich the ruling party.

China has referred to its US Treasury I.O.U.s as a WMD that could sink the U.S. economy and USD were China to dump I.O.U.s wholesale. Just the announcement of intent to sell would do that job. Of course, annihilating one's best customer and the currency of one's own bank account isn't very good policy if one wishes to stay in business much less afloat. However, China's tremendous leverage upon a bankrupt USA is not lost on ruling elites of both nations. After all, beggars can't be choosers, albeit this beggar is armed with thousands of deadly nukes and a precedent for their use.

In any case, highly influential Oxford-educated Yu Yonging, former China Central Bank advisor, has made it very clear that China must be accomodated in the new monetary order. When China bid for Unocal, GWB and Congress blocked the sale. However, things are different now, radically so, politically and economically. I surmise the "accomodation" will likely take the form of allowing China to buy up US assets--with China's eye toward voting stakes in oil and oil-service companies, mining companies, agricultural conglomerates, select major US corporations, not mention land (forested and arable) and water resources.

China's grip on US economy grows
http://news.asiaone.com/News/Latest%2BNews/Business/Story/A1Story20081014-93646.html