At the same time, China seems to be suffering a housing bust that rivals that of the United States and Britain. New house prices are down by more than 25 percent year on year, and the sales numbers have collapsed by two-thirds, just as a great deal of speculative new building is coming onto the market.

Add in China's inflation problem, its rising wage levels (although labor income is falling as a share of China's GDP) and the well-known challenges of environmental degradation, and the Beijing leadership has a problem. Of course, it also has a solution, in the form of the massive cushion of its holdings of foreign (mainly American) assets of more than $2 trillion.

But even as China's total pile of American assets grows with its massive export machine, the value of the individual dollars in Chinese hands has been dwindling as the dollar has weakened against other currencies. So far, China has been able to grin and bear it, calculating that the best way to continue the export boom was to lend Americans the dollars they need to carry on consuming beyond their means. That's fine, but it cannot last forever, and at some point it has to stop.

One such moment seems to have come in the first week of this month, when China began selling some of its large stocks of Fannie Mae and Freddie Mac holdings, one of the factors that triggered the weekend bailout by the Bush administration.

So it is an interesting coincidence that sees the publication this week of "Sovereign Wealth and Sovereign Power," a thoughtful but deeply alarming report by the prestigious Council on Foreign Relations that says America's mounting foreign debts are "an underappreciated strategic vulnerability."

"The United States' main sources of financing are not allies," the report says. "Without financing from China, Russia and the Gulf States, the dollar would fall sharply, U.S. interest rates would rise, and the U.S. government would find it far more difficult to sustain its global role at acceptable domestic cost."

Hitherto, U.S. policymakers have paid little attention to this matter on the grounds that American debts and Chinese and Russian and Arab loans and investments are mutually beneficial, and that the process gives the Chinese and Russians and Arabs a strong incentive to support the U.S. economy as a matter of mutual self-interest.

So the idea of a financial version of the nuclear option has had little credibility. If the Chinese or Russians decided to strike a sharp blow at the United States by dumping their U.S. assets on world markets and watching their price collapse, they would suffer a massive financial loss. This is what former U.S. Treasury Secretary Larry Summers had called "the balance of financial terror."

The CFR report accepts this but notes that the matter does not rest there, because China now has other options. There are various ways that America's debts can be used as leverage to modify U.S. policy at far less cost. It could steadily sell its dollar holdings for euros, yen, pounds, Swiss francs or gold. There is some sign that this is already happening. China and Russia have been accumulating euros, and China's State Administration of Foreign Exchange has accumulated close to $20 billion in shareholdings in Britain's blue-chip companies, led by energy giant BP and HSBC Bank.

The CFR report notes that China (or Russia or the Gulf States) could also sell off riskier U.S. assets and shareholdings and buy safer ones instead. This is what happened when China began selling Fannie Mae bonds and buying T-bonds instead, which brought worrying instability to the U.S. market at little cost to China.

Moreover, China does not need to put all its eggs into the U.S. basket. As the CFR report notes, "China's interest in supporting the U.S. to ensure the health of its exports has been diminished by the development of other markets: China's exports to Europe now exceed China's exports to the U.S.; exports to Africa, Russia and the Middle East are growing far faster than exports to the U.S."

The result of this is not only that China is less dependent on the U.S. economy, but that at some point, whether triggered by a major policy dispute over Taiwan or some other hot spot, China will have to make a very delicate calculation. As the CFR report notes, the shrinking value of dollar-denominated assets means that "U.S. financial stability relies on China's ongoing preference to take larger losses in the future rather than a smaller loss today."

This brings us back to those post-Olympics blues and China's nervousness about its own economic health as its property market follows its drooping stock market into trouble. The cushion of China's massive dollar holdings may be comforting, but any decision by Beijing to use a significant part of it to help the Chinese economy could have an alarming effect on the United States and thus on the global economy.

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