Clinton says China holdings threaten U.S. security

INDIANAPOLIS, Indiana (Reuters) - The Bush administration has jeopardized national security and the ability to intervene in world crises because of the huge U.S. debt held partly by China, Democratic presidential hopeful Hillary Clinton said on Saturday.

The New York senator, who argues she is better prepared to deal with economic and foreign policy problems than rival Illinois Sen. Barack Obama, told a rally in Indiana that the United States' $9 trillion in gross national debt puts it at the mercy of other nations.

She said President George W. Bush's policies contributed to rising U.S. debt and also have hamstrung Washington's ability to lead.

"That is what George Bush's policies mean in real world terms -- that we have put our nation's security and our leadership of the world at risk because of this indebtedness," Clinton said.

Clinton made China the focus of her criticism, which she has repeated throughout Indiana, a state that has suffered from manufacturing job losses that many blame on unfair trade practices and companies outsourcing jobs to China.

Clinton hopes to win Indiana's Democratic nominating contest on May 6 in a bid to close the gap with Obama who leads in amassing delegates who determine the party's nominee.

In her campaign remarks, she lamented China's hold over the U.S. economy.

"We are so dependent upon decisions made in other countries' capitals," Clinton said, singling out China's potential power over U.S. foreign policy decisions because of its financial leverage.

Clinton cited a discussion she had with a retired general who raised a "nightmare scenario" in which China threatened Taiwan and the U.S. president wanted to send ships toward the island to ward off Beijing.

"He said, 'You know, suppose the Chinese decide that they're going to go after Taiwan the way we see them, you know, with Tibet,'" Clinton said, describing the general's remarks and referring to the recent unrest in Tibet.

"'We start to move the fleet, and the Chinese say, 'Fine. You do that, we will dump your dollars. We will flood the market. We will not buy any more of your debt.'"

China currently holds about $490 billion in U.S. Treasury securities and has foreign exchanges reserves totaling more than $1.5 trillion dollars.

Clinton accused Beijing of manipulating its currency and of not holding its exporters to the same health and environmental standards that U.S. companies must meet.

The U.S. trade deficit with China soared last year to a record $252 billion even as the U.S. trade gap with the rest of the world decreased.

Many U.S. lawmakers complain that China deliberately undervalues its currency to boost exports and limit imports and have pressed Bush to be more aggressive in addressing the issue.

(Additional reporting by Doug Palmer in Washington, editing by Vicki Allen)

(To read more about the U.S. political campaign, visit Reuters "Tales from the Trail: 2008" online at blogs.reuters.com/trail08/)