China has been artificially keeping its currency undervalued in relation to the U.S. dollar. While this has made Chinese products cheaper for American consumers in comparison to domestic-made and other foreign products, these cheap Chinese goods have also forced many U.S. companies to either outsource their production to countries where costs are lower, or go bankrupt.

In an attempt to save what is left of the eroding U.S. manufacturing industry (evidenced most recently by yesterday’s announcement that Ford will cut at least 25,000 jobs), American politicians have been threatening to levy tariffs against Chinese imports if the Chinese do not stop supporting the U.S. dollar and allow their currency (the yuan) to appreciate. Their idea is that the currency revaluation will make Chinese imports more expensive and American manufacturers more competitive.

For China to allow its currency to appreciate against the U.S. dollar, thereby helping American manufacturers, it would have to buy fewer U.S. Treasuries, and/or sell its current holdings. There are signs it is considering doing just that. Earlier this month, China’s foreign-exchange regulator signaled a desire to diversify its massive foreign-currency holdings.

As of the end of September, China’s foreign-exchange reserves totaled $769 billion. Of that amount, approximately $247.6 billion, or almost one third, are U.S. Treasuries. Only Japan holds more than that. Since China is such a major buyer of U.S. Treasuries, a loss of demand for U.S. Treasuries could cause the value of the dollar to drop—but any U.S. dollar drop would also mean that China’s current holdings of U.S. Treasuries would be devalued too.

So why would China allow its currency to appreciate and let the U.S. dollar drop, when this would devalue its U.S. Treasuries and reduce its low-cost manufacturing advantage?

There may be several reasons why China may officially stop supporting the dollar.

The first is that China may have found a way to unofficially support the dollar and slow the yuan’s appreciation. The Chinese government recently announced that it is planning to abolish its “quota on foreign currency that Chinese companies are allowed to buy each year for investment offshore” (Wall Street Journal, January 6). In other words, China will allow Chinese companies to hold as much foreign currency as they want to. One reason a company would want to hold a lot of foreign currency is if it was going to purchase a foreign company.

By allowing their companies (of which many of the largest are government controlled) to purchase more foreign currency (consequently selling Chinese yuan), the Chinese may be able to slow the rate of Chinese currency appreciation relative to the dollar.

However, as the Wall Street Journal says, a possible side effect of allowing Chinese companies to hold more foreign currency is that it “could unleash a buying binge among … Chinese companies looking to expand abroad” (ibid.).

China’s thirst for resources is well known. As it seeks to obtain more sources of supply, American companies will probably become frequent targets. Last year’s well-publicized takeover bid of American-owned oil company Unocal by Chinese oil company cnooc is just the beginning of many more to come.

Reducing the cost of resource imports may be another reason why the Chinese government would allow its currency to rise against the dollar. For example, as the yuan appreciates, the cost of oil, which is priced in U.S. dollars, would drop correspondingly in yuan terms.

Whatever the reason, when the Chinese decide to stop supporting the dollar, allowing the yuan to appreciate, it will be because they think it is the best for China. It won’t be out of the goodness of their hearts, and it won’t be because they feel sorry for their competition, the American manufacturers.

The signs of America’s pending collapse are all around for anyone with an open mind to see. The day is nearing. Don’t be caught unaware.