BEIJING: The People's Republic of China is an old dog that has learned some nifty new capitalist tricks over the past three decades. One of which is to achieve its desired ends by holding weaker partners to ransom.

The Bush administration's Faustian pact with communist China had, by the end of 2006, resulted in a global trading imbalance of $856.7 billion (€623.19bn; £424.07bn), representing a record 6.5% of the total US economy.

That sum is largely underpinned by China's $900bn holding of US Treasury bonds, a situation that - to coin a mixed metaphor - has left Faust with the Sword of Damocles suspended above his head.

According to the latest data from the US Commerce Department, the current year's trading to May 30 has increased that deficit by a further $60bn.

At which point the student capitalist turns professor.

The Chinese government has let it be known through its usual oblique channels that if Washington imposes trade sanctions to force a revaluation of the yuan, it might liquidate its vast $1,330bn holding of US Treasury bonds.

If that threat were carried out, its effect on the US and world economy would be cataclysmic.

Following the Beijing visit last week by US treasury secretary Henry Paulson, two officials at leading Communist Party bodies dropped strong hints that the People's Paradise might use its $1,330bn of foreign reserves as a political weapon to counter pressure from the US Congress

Said one, He Fan, an official at the Chinese Academy of Social Sciences: "Russia, Switzerland and several other countries have reduced their dollar holdings. China is unlikely to follow suit as long as the yuan's exchange rate is stable against the dollar."

So far, so good. But here comes the gun to head.

"The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar."

Says Simon Derrick, currency strategist at the Bank of New York Mellon: "The words are alarming and unambiguous. This carries a clear political threat and could have very serious consequences at a time when the credit markets are already afraid of contagion from the sub-prime troubles."

Paradoxically, the Chinese threat might be welcome news at Hillary Clinton's presidential campaign headquarters.

Senator Clinton has frequently called for restrictive legislation to prevent the US from being "held hostage to economic decisions being made in Beijing, Shanghai or Tokyo".

She argues that foreign control over 44% of the US national debt has left America acutely vulnerable.

Data sourced from; additional content by WARC staff