China currency revaluation

The recent revaluation and limited float of the Chinese renminbi had been pushed hard for by the Bush Administration, who continue to press for further revaluation (read: devaluation). However, the Bush Administration seems to ignore what the Financial Times is reporting today, that foreign exchange reserves held by the Chinese government are expected to fall relative to the same period last year. This has a significant downside potential for the U.S. government. With the Bush Administration running large deficits, coupled with the large trade deficit with China (which is not really new, it's just a shift from deficits with other Asian countries, particularly Japan and South Korea), a reduction in foreign exchange holdings by the Chinese government could help precipitate a currency crisis if other countries are not willing to take up the slack from China. It will force interest rates higher to induce people to purchase U.S. T-bills and notes which will hurt growth within the U.S. and could be accompanied by a sharp drop in the value of the dollar, which would help domestic producers who export a lot, but would hurt consumers of foreign made products (most of the American population). Instead of pushing a further revaluation of the renminbi, the Bush Administration should focus on reducing the budget deficit (hint: it doesn't just involve cutting non-homeland security domestic spending, it also involves taking another look at the regressive tax cuts of 2001, 2002 and 2003).