The friction between China and the United States, caused by an imbalance in bilateral trade, was further strained following a controversial report in Britain's Daily Telegraph on August 8. The report quoted two Chinese economists who purportedly warned that China might "liquidate its vast holdings of U.S. treasuries if America imposes trade sanctions to force a yuan revaluation."

Not so, said Xia Bin, Director of the Finance Research Institute of the State Council Development Research Center, China's top think tank, who responded saying he was misunderstood. "My point is not to sell off the greenbacks, but to suggest the government how to bargain with trade protectionists," Xia explained, denying any threatening remarks.

He Fan, a Harvard-trained economist at the Chinese Academy of Social Sciences, also argued that his comments that "gradual appreciation of the yuan benefits both China and the United States" were misinterpreted by Daily Telegraph.

In response to the London-based newspaper's reference in its report to a bill approved by the U.S. Senate Finance Committee in July requiring retaliatory tariffs against Chinese imports to force a faster appreciation of the Chinese currency, He revealed that the original source of his quote is an article he wrote in March of this year, which was published in China Daily on August 7. Both Xia and He said that Daily Telegraph had never contacted them on the reserve issue.

If China initiated a dump of its dollar assets, Daily Telegraph warned that the effect may impact other international investors, worsening the subprime mortgage crisis, causing a spike in U.S. bond yields, collapsing U.S. vulnerable housing market and eventually triggering an economic recession.

The depreciation of U.S. currency value and its economic recession, however, do not work in China's favor. More than 60-70 percent of the country's $1.33 trillion foreign exchange reserves are in dollars. In the event of a slump, China's foreign assets will shrink fast. Moreover, the United States is a major destination for Chinese export commodities, and any downturn in consumption will lead to a sharp decrease of exports, and increase in unemployment. In addition, depreciating the dollar could trigger a trade war that disrupts the world trade pattern and financial security.