The real reverse bailout
Counting the funds Kuwait and Korea committed to Merrill and Singapore and Kuwait committed to Citi, sovereign funds have provided US and European banks about $42b in new capital over the past two quarters.
That tops the $30b the IMF lent out over a four quarter period in the Asian/ Russian crisis of 1997-1998, and is roughly the same size as the $40b or so the IMF lend out to Argentina, Brazil, Turkey and Uruguay over a two year period in 2001-2002.
But it pales relative to the $54.7b increase in the New York Fed’s custodial holdings for foreign central banks between January 2 and January 30 of this month. Counting ADIA’s contribution along side the contributions from KIA and the GIC, Citi raised about $17.5b from sovereign wealth funds over a three month period. The US Treasury — judging from the rise in the New York Fed’s custodial data — got $29.7b in a single month. Custodial holdings of Agencies increased by only a bit less, $25b. (Data here)
$55b a month — $630b a year — is a very large sum. It is almost enough to cover the US current account deficit, at least in the absence of any capital outflows from the US.
The New York Fed’s custodial data rarely captures all of the growth in central bank dollar assets. It may, though, be unusually strong in January for seasonal reasons — everyone sure seems to have woken up on January 1 and either decided to shift from bank deposits to Treasuries or to transfer the Treasuries they bought in London in December over to the New York fed for safe keeping.
But the strong rise in the New York Fed’s custodial holdings in January also isn’t inconsistent with data from the big central banks that suggests that global reserve growth was very strong in q4 — in the order of $300b. $55b a month isn’t an implausible sum. Far more money is still being stashed away in central banks than in sovereign funds, and far more money is still being invested in safe government bonds than in more risky assets.
My guess is that when the Treasury releases the results of the next survey at the end of March, the overall increase in central bank holdings between June-2006 and June 2007 will set a new record. And my guess is that the data for June 2007 to June 2008 will be almost as big — though it still a bit too early to tell.
Sign of changing times. Chinese banks push US banks out of the picture:
http://www.bloomberg.com/apps/news?pid=20601109&sid=aBhYtHt.s3gM&refer=exclusive
And their size will be rising along with the value of the yuan.
Brad,
The seasonality of central bank custody holdings may arise because central banks have less need than commercial banks to cut back their risk for the last day of the year, and so are willing to lend out treasuries across the turn and place the proceeds in an unsecured deposit to pick up the turn premium.
Is there evidence that central banks actually do such opportunistic year end lending? (e.g. reported balance sheets). If so, how much?
Prudent decision by Chinese Banking regulators to ban any investment in Citicorp by China Development bank. Citigroup is perhaps one of the worst managed banking institutions in the world.
http://globaleconomicanalysis.blogspot.com/2008/02/citigroups-strange-new-definition-of.html
Report: China to block Citigroup sale
http://www.businessweek.com/ap/financialnews/D8U5M7TO0.htm
The cash-strapped Citigroup, hurt by the mortgage crisis that boiled up last year, has been seeking foreign investors, including China Development Bank, to boost its balance sheet in the face of mounting write-offs.
The Journal reported that opposition from the Chinese government seems to have surfaced over the weekend, citing an unnamed person familiar with the situation.
And the band plays on…
The world is stuck financing the US. The world created the mess and now they have to live with it. I don’t see any way out. It’s nice to know that the US can do whatever they want. It doesn’t matter how irresponsible our actions, we always get bailed out.
Dave,
Clearly Citi is a bad investment, but is it any worse than buying t-bills? China has to invest USD, so they have to invest in the US. What better option do they have? Personally, if I were China, I would buy something outside of financials and real estate. Something you could bring back home and benefit from. Maybe buy something like Human Genome Sciences and get all their technology and data.
ISM came in at 41.9. I guess we really are in a recession.
State-owned Chinese and Russian firms to create a giant metals partnership spanning Africa and China
http://www.reuters.com/article/rbssIndustryMaterialsUtilitiesNews/idUSL0428909720080204
MOSCOW, Feb 4 (Reuters) - United Company RUSAL, the world’s largest aluminium producer, said on Monday it will partner China Power Investment Corp (CPI) in building a 500,000-tonne smelter in western China and a bauxite and alumina complex in Guinea.
UC RUSAL said in a statement it had signed a memorandum of understanding with CPI, a major Chinese energy firm, giving it 49 percent of a smelter in Qinghai province that will have capacity to produce at least 500,000 tonnes a year of aluminium.
The smelter will be supplied with energy from CPI’s hydroelectric power facilities on the Yellow River.
CPI would also own 49 percent of a new bauxite and alumina complex in Guinea, which will have capacity of up to 2.8 million tonnes of alumina per year.
US sees financial threats on the horizon:
http://sg.news.yahoo.com/rtrs/20080205/tbs-security-usa-threats-7318940.html
Can the Pentagon handle this? Or maybe we can stop loaning money to China and Russia and OPEC. That should do it, right?
Disgruntled observer a.k.a ecologist,
You write: “China appears to be attempting to rapidly progress from r - k, building up a diverse industrial base, although better redistribution of income would aid it greatly, whilst Europe with its slower growing and more diverse industrial base with high investment rates, and more efficient and equitable distribution of income (I’m sure some will debate that vociferously), has opted for a strategy closer to the k end of the continuum. ”
You are absolutely correct in terms of China’s plans: Rapid industrialization. You might want to read more on China’s timetable as stated by the CAS (Chinese Academy of Science).
In another blog, I outline some of China’s timetable/objectives etc. with links to pertinent translated documents.
http://angrybear.blogspot.com/2007/04/china-now-to-2100.html
http://angrybear.blogspot.com/2007/12/china-rostow-global-warming-west.html
China used the work of Walt Rostow (Lyndon Johnson economic advisor, economic historian–”Stages of Economic Growth”) as the theoretical groundwork for industrialization. In short, China has a plan for how to become what it calls a “frontier” country.
The cost of this rapid industrialization is seen on a number of fronts, two of which interest me: the environment and labor. I would posit three observations:
1. Consumption will be postponed while the industrial base is being created. China will not soon become a consumer society; not in the game plans. Any hopes that China will soon become a vast market place for finished goods are illusory. SWFs are being used to acquire those elements that will help aid in becoming a “frontier nation.” I include here investments in large financial institutions, IT corporations, and corporations controlling resources. In short, China is perfectly willing to leverage its primary strength: Its cheap and vast workforce. This is an intelligent, well-conceived plan—even though I think it will fail in the long run. This may sound harsh, but keeping the labor cheap while the industrial base is building keeps the leverage.
2. China is willing to pay the environmental cost—which is becoming unexpectantly high—as it makes its great leap forward. Again, this may sound harsh, but ignoring the environmental cost provides an additional lever.
3. It is a profound mistake to measure China’s actions with a very short ruler. The West is used to thinking in immediate returns. Was the purchase of 3-Com wise? Did China make a sound investment in Merrill Lynch? Now, while it may be true that some of its purchases or investments may backfire in the short term…or even the long term…, there is a logic to what is being done. Ignore that logic at your peril.
All of this is not to say that China has no plans for ultimately bettering the lot of its people or of the environment in which they live. It does. Moving rapidly from a third world country to a “frontier” country brings with it certain costs.
guest — presume you mean stop borrowing ..
I think Charlie nails it on the head. THe US will always get bailed out as long as the current global financial system remains in place. Thats why I dont understand the US is in structural decline argument. Hard to be in a decline when everyone ships there savings off. If anything it speaks to the dependency the rest of the world has on the US.
The weakest link in the global economy will soon break. The weakest link in the global economy is the overleveraged US consumer. Every economy in the world to varying degrees will be impacted. Latin American and Western European economies are more exposed than China to the US market (ie. only 20% of China’s external trade is with the US economy today ).
http://www.nytimes.com/2008/02/05/business/05spend.html?_r=1&ref=business&oref=slogin
The freewheeling days of credit and risk may have run their course — at least for a while and perhaps much longer — as a period of involuntary thrift unfolds in many households. With the number of jobs shrinking, housing prices falling and debt levels swelling, the same nation that pioneered the no-money-down mortgage suddenly confronts an unfamiliar imperative: more Americans must live within their means.
so the willingness to lend, at least in part, may be attributed to the fact that foreigners still have greater faith in the ‘U.S. economy’ then their own
“…Deputy Prosecutor-General Alexander Buksman said in November 2006 that corruption in Russia amounted to $240 billion a year, a sum almost equal to the country’s budget revenue…” http://www.bloomberg.com/apps/news?pid=20601109&sid=aCOuLsqCbpXI&refer=home
“…The government also is trying to root out corruption in banks, where regulators discovered 860 billion yuan ($119 billion) in “irregularities” last year…” http://www.bloomberg.com/apps/news?pid=20601080&sid=a6vjTCSLR6Rk&refer=asia
on the topic of bail-outs, might you be persuaded to update these points? (isn’t Turkey now the IMF’s #1 client?)
“…If the G-7 wants to give a politically important country like Turkey a special break, it should do so on its own…” http://www.iie.com/publications/newsreleases/newsrelease.cfm?id=103
guest — no. foreigners do not currently have more faith in the us economy than their own. in both Russia and China, private funds have been moving into the country — despite various problems. Russian banks have received “dedollarization” inflows, and the share of $ deposits in China’s banks has gone way down. The global flow of funds shows this very clearlty — china and russia and the gulf are all accumulating more reserves (counting SWF assets) than can be explained by their current account surpluses.
you can argue that is doesn’t make sense, but the big shift over the past five years has been the increase in the confidence of emerging market citizens in their own economies, and the fall in their confidence in the US economy — as demonstrated by the swings in private global capital flows. the outflow from the emerging world to the us is entirely an official flow (in net), and thus arguably reflects the confidence EM governments still have in the US.
turkey is the imf’s number one client, but that just reflects the fact that it is still borrowing from imf — that loan worked better than I expected. the challenge for the imf is that soon it will have no big borrowers, and it relied on borrowers for income.
“…The government also is trying to root out corruption in banks, where regulators discovered 860 billion yuan ($119 billion) in “irregularities” last year…” http://www.bloomberg.com/apps/news?pid=20601080&sid=a6vjTCSLR6Rk&refer=asia
Corruption is a serious problem in China, but serious criminal offenders caught often end up with a bullet in their head unlike the Enron and co-conspirator Citicorp corporate executives that spend their retirement on the golf course country club. Once in a while, a high level government official is executed including recently the chief of China’s Food and Drug Administration (FDA) charged with taking bribes from drug companies. According to a relative in Guangzhou that works in China’s banking system, while it is ok to wine and dine officials to lobby for a contract, there are serious consequences for directly giving a red envelope of money as a bribe.
just to agree with Charlie and Shrek,
the world’s financial system is run by banks and hegde funds which in turn are run by massively overpaid Americans or by foreigners who desperately want to be massively overpaid Americans (or as near to this ideal as is humanly possible without actually holding a green card), and they will all support the US financial system (which is the only system that offers them wealth beyond even their wildest dreams, i.e. they will support the dollar) until their last dying breath, or until it becomes absolutely positively 110% clear that the US is absolutely totally and utterly fu*#ed; by which time it is way way too late.
China’s ICBC Bank writes down its 1.2-billion-dollar US subprime mortgage-related assets
http://afp.google.com/article/ALeqM5iH3p2fc9_ouu5rGsUiJfYf21ReMg
The bank has increased provisions to cover 30 percent of its 1.2-billion-dollar US subprime mortgage-related assets in the fourth quarter, the China Business News reported, citing chairman Jiang Jianqing. That means ICBC has set aside around 360 million dollars.
Bank of China, with 7.95 billion US dollars of investments in subprime-related securities, the largest subprime exposure in Asia, is believed to have to set aside larger-than-expected provisions for subprime losses.
how about other “countries that are too strategically important to fail” (criteria?) along with the other 4 points? if ‘G7′ is now replaced or augmented?
Back when the mainstream US business media repeated over and over that the Asians were holding the bulk of the subprime MBSs, I tried to point out that everything showed they were not. Sure enough, as a group they have the least exposure to the AAA rated subprime crap. It was the Europeans, GSEs, US Corporations, US pension funds and hedge funds.
umm, the US (tho perhaps the world’s central banks consider it too commercially important to fail rather than too strategically important to fail) …
as for strategic importance –
alliance (turkey, korea)
bases (Turkey, korea)
nukes (russia, korea generally speaking, pakistan)
and borders (mexico/ US; turkey/ europe and iraq)
turkey scores unusually high on every criteria except nukes. and in 98, the us showed that no country is too nuclear to fail …
very off topic tho.
are the obvious criteria
Martin Mayer had a good article on how the “dollar dump” problem operates as a distraction in a similar way that the SWF operates today:
“What we have to watch out for is a sudden and drastic increase in foreign official holdings. Rapid growth in this number in the late 1960’s and 1970’s forecast the recessions of the early 1970’s and 1980’s, and it could happen again.
Recent large increases in foreign official holdings indicate that foreign private investors see fewer attractive places to put their money in the American economy. They could presage a significant fall in the price of American assets, stocks (witness the recent drops in American stock markets) and bonds and real estate and all, and a hard landing for a world economy still floating on the crest of cheap credit.”
From: http://www.brookings.edu/opinions/2006/0614monetarypolicy_mayer.aspx
Well I suppose posting this now is a little late since we’re all aware of the precipice, but I thought the clear headed explanation of what the sudden rise in custodial holdings means was useful.
naive question –
when everyone rushes for the exits, does the money go down that internet undersea cable that got accidentally ripped up last week ? how does it physically arrive / leave ?
Stormy
That is the best commentary on China development strategy that I’ve ever read. But why? It doesn’t have to be that way.
I don’t even remember the name Walt Rostow and haven’t read “Stages of Economic Growth”. But reading your post I imagine this is what I’ve been calling, perhaps imperfectly, the “Japanese model of the 1960’s”. Why have the Chinese chosen this path? They don’t have to. China is the center of gravity on earth.
In the late 1990’s I was working for a US raw material supplier. At that time our US customers had been battered by high exchange rates in the 1980’s and the domestic recession of the earlier part of 90’s. Our Japanese customers had vanished and with the Asian financial crisis and our Indonesian customers vanished too. We were constantly looking for a place to pick up the slack. We used to have these long, indeterminable, useless staff meetings and I remember one of the senior people lamenting the disappearance of the Japanese business. And I told him that whatever we had lost in Japan we would make up in China. OMG. China? Nobody thought anybody could do business there. Too scary. But I had been reading about it. And everything I read was like contemplating stars. Billions and billions as Carl Sagan would say. It’s still like that. The Taiwanese, who were not important customers of ours at the time, were already relocating 200 factories/year across the straits into Guandong province. And they had been manufacturing all their lives. They knew how to build a factory! Right behind them was every ethnic Chinese in south and south-east Asia, the Japanese, and the Koreans. Center of gravity. The black hole of FDI. The US industry never got into it. Too scary. Better just to source from the Taiwanese, now Chinese, competition. No investment. No development costs.
Here is the funny thing. We were told, by everybody that had any data, that those factories were designed for the domestic market. That they exported only 10%- 15% of their production. Very believable. And it conforms to broader data mentioned recently by Mr. Setser. Yet, US companies were always able to source anything they wanted on favorable terms. Small productions that our US industry wouldn’t have even wanted to think about? No problem. Want something different? Just fax a drawing. Bring it back here and market it up to US prices.
Why would they do that? China breaks the mold. It would seem that they didn’t have to be bothered. A couple of weeks ago Mr. Setser was asking if CIC made rational investment decisions. From who’s point of view? Ours? Maybe not. Theirs? I’m not the one to ask.
I am sure that nobody can understand China that doesn’t understand her history. That history being long and, let us say, checkered. And it’s not all ancient history either. Great leap forward, 1959. 30 million people starved. I’m quite sure Mr. Hu knows that history much better than I. And it seems to me, though I don’t understand clearly, that this history is the source of a political factor which influences all Chinese decisions. The Chinese leadership is acutely aware of tensions within the population. I believe it was here where I read a post from a Charles Steele and who commented on instability in China. Somebody immediately attacked that with the argument that China was growing so fast and poverty was being alleviated, etc., etc. and that there was no threat to stability. That’s how things would be here under those conditions. That’s the paradox. They are growing fast and it can be unstable. And lest we forget. There are a lot of people in China who are doing really well. And they have an interest in stability and the status quo.
All of this pertains to Mr. Setser’s study of Chinese capital flows into US securities. I apologize for the fact that this post doesn’t live up to the quantitative analytical standards normal here.
- jd -
Obliquely on-topic via the effect of the savings glut on interest rates:
You’ve commented numerous times on your puzzlement over the failure of US interest rates to respond in synch with the requirement to fund a persistent and sizeable US current account deficit.
Looking for the answer in the future rather than the past, your colleague Nouriel Roubini has it exactly right in forecasting “stagdeflation” risk for the US economy. Embedded in this is the explanation for US as well as global interest rate behaviour:
“The fact that the most likely scenario in the global economy in 2008 is one of a negative global demand shock is the one that is priced by bond markets: if investors were really worried about a rise in US and global inflation - or about true stagflationary shocks - the yield on long term government bonds would have not fallen as sharply as it has since last summer. With US 10 year Treasury yield now well below 4% and sharply falling in the last few weeks it is hard to see a bond market that is worried about global inflation or global stagflation. And while until recently commodity prices pointed to the other directions, recent weakness in oil prices, the cost of shipping commodities and the price of some other commodities also signals that commodity markets are now pricing the risk of a US recession and the risk that - with a lag - a US recession will lead to a broader global economic slowdown”
(From the excellent: http://www.rgemonitor.com/blog/roubini/238726)
This synopsis, which will turn out to be true in my view, is also consistent with the view that inflation risk has been largely misinterpreted over the past several years.
Moreover, US dollar weakness will turn out to be a welcome buffer against this deflationary risk from the global economy.
Inflation has not been a true cyclical or secular risk since Paul Volcker destroyed it more than 25 years ago. Inflation is dead.
Moreover, the difference between headline and core inflation is properly interpreted as deflationary risk in the future due to demand side shock risk associated with that price component. I think this is consistent with Roubini’s thesis.
Dave Chiang - “The weakest link in the global economy will soon break. The weakest link in the global economy is the overleveraged US consumer.”
What percentage of American citizens are overleveraged? What percentage of U.S.-based businesses are overleveraged? And what are the margins to which you are referring?
We´re going to see a massive rally in the US Dollar and the Japanese Yen against the Euro, Pound from now on.
It´s going to be interesting.
gillies — i guess cutting all the underseas data cables would be one way to keep money from rushing to the (electronic) exits. I am not sure if enough satellite capacity exists …
in any case, the $ rallied on bad Us economic news today, as i guess folks are now expecting weakness in the us and more concerned about signs of weakness in europe.
guest — presume you mean stop borrowing ..
Written by bsetser on 2008-02-05 11:58:58
No I meant loaning because I was being ironic/sarcastic.
As for example Paulson might say to China: if you don’t let the yuan appreciate we’ll fix you by not loaning you any more money. LOL (laughing out loud).
McConnell said U.S. intelligence agencies had “concerns about the financial capabilities of Russia, China and OPEC countries and the potential use of their market access to exert financial leverage to political ends.” -Reuters
What I find eerie is the fact that this concern is voiced by someone from the intelligence community, as opposed to by the president or presidential candidates, who ultimately will have to face this issue and quite possibly do something about it. But what? What are the options?
Economics and politics are not easily separated in the big picture, but how will this issue be presented to the American voter this fall? Maybe they’ll choose to ignore it completely, which would be even more ominous.
there is a big disconnect between the views of the intel community and dod on these issues and the view of wall street that I think all the candidates have decided to avoid addressing directly …
Jd,
Why is it this way? To a large extent, character is destiny. China and America are quite different entities. They have different political structures, different ideals, different demographics, etc.
I don’t like the metaphor of a contest, but for the moment let’s consider it wrestling match.
Consider only two players: U.S. and China. (The U.S. represents the developed nations; China, the developing or underdeveloped.) Simplify what each is so that you can see the outline of what is happening. (Each is more complicated than I present; nonetheless, the underlying pattern is generally true.)
China’s one great strength is the size of its population. It believes in one party rule, in government or collective ownership. The party controls all its institutions. China measures its progress by comparing itself to other nations. The success of any one individual or group of individuals is not central.
America is (maybe was) at the top of its game, militarily, economically, scientifically, etc. Believes in privatization. In its trade deals, America rides roughshod over weaker nations. (David will attest to this. Chuckle.) When it enters a weaker nation, it buys up the assets and exploits the indigenous labor force. America measures its progress by the individual’s accumulation of wealth. We celebrate the rich and famous, the multi-billionaires.
In Tae-kwon-do, you use your opponent’s strengths to your advantage. China offered America a vast and cheap labor force and was willing to allow that labor force to remain cheap (the dollar peg is one aspect of that; a cavalier approach to the indignities of sweat shop labor is another). In effect, China said to America, “I am yours. Exploit me if you want…if you can!”) America had always been successful in dealing with weaker nations. It entered China just as it had entered other undeveloped countries: Ready to buy up assets and exploit the labor force. American companies rushed to China as if it were a new gold rush. Indeed it was. Many American companies made great profits; the American consumer got cheap goods as it lost its manufacturing base—and, of course, America went deeper in debt. The conservatives were happy because business was good. “Debt is fine,” they said. “Hey, they have to buy our t-bills to keep our credit good. Party on!”
Recently China is changing some of its rules: The tax break FDI got over indigenous Chinese firms, for example. Initially, mergers and acquisitions were free and easy. Are they now? Now it is ready to give its own companies a chance.
The Contract Labor Law is an example of another change, making exploitation of its labor forces just a little more difficult. Get the companies in; change some of the rules. Quite normal. China thinks of China and its interests. Americans rarely think of America’s interest; they are too busy pursuing their own individual interests.
As America employed its power to get its way, China seemed to yield. As your opponent comes at you, move with him…not at him. Combine your power with his to defeat him. Let the power of his thrust be his final undoing. China’s power is its vast, poor population.
Again, I use the wrestling metaphor as a means to see what happened, is happening.
The rise of the SWF, along with the purchase or investment in many American companies, is a sign that the advantage seems to be going to China, to command economies.
I did say that I do not think China will succeed. It won’t. But neither will the U.S. The end result will be that both will trip clumsily and fall all over each other in a heap…unless both change their ways. Unlikely…until each is absolutely force to.
As Brad as said repeatedly, imbalances will be corrected whether we like it or not. One nation cannot have all the debts and the other all the credit. One cannot be an exporter and the other an importer. Trade has to be a two way street. Something will give. Imbalances are not good for either nation. I would argue that, while the subprime mess may be the direct responsibility of our financial institutions, there is a connection between it and the contest I spoke of.
Economically, it will not end well, although both may get through this mess. Beyond the economic issue lie two huge hurdles: Resource depletion and global warming/pollution—namely, the environment. Man certainly creates the pollution. I do not care, for the sake of this argument who or what creates the warming. In terms of global warming/pollution, America disregards it because it hurts profits. China disregards it because it has other priorities. In terms of resource depletion, China is playing a smarter game: Nationally acquiring those assets that may help it. America relies on private enterprise; but the interest of its great corporations may not be the same as America’s. They are not called multi-national for nothing.
A great deal more can be said. Sorry for the long post. I will be quiet and read.
“Americans rarely think of America’s interest; they are too busy pursuing their own individual interests.”
Hello! Thats why its so successful. Economic nationalism is BS
Hi Brad, Gillies, Stormy, et al,
One of the beautiful things about being an observer of nature is that it offers an embarrassment of riches from which to draw a point of view.
Just focusing on the macro picture, there appears to be an incredible similarity between the world’s hydrological cycles and the financial cycles of the global economy. Consider the El Nino phenomena. Occurring every few years it upsets the trend of warm water flow to the Indian Ocean and away from the coast of Peru, essentially turning it on its head. Rain falls in the coastal desert of Peru, whilst droughts occur in Australia, Indonesia, India, etc, etc. Then it switches back again. Typically when that event occurs there is a one to 2 year lag, which affects the Atlantic Ocean. Trade winds go into reverse.
Time will tell if a north pacific financial oscillation has been created.
More locally, it has major effects throughout the terrestrial eco-systems. Large parts of the Amazon for example suffer from enhanced dry periods and even droughts. Rivers shrink to a fraction of their size and fires occur in rainforests that shouldn’t catch fire. In short it disrupts the normal flow of liquidity to a liquidity dependent system.
The response of the system really depends on how it functions under “normal” conditions. Imagine that the sun represents oil; water, money; and humidity rates, savings, that are directed skyward to create cloud deposits, which occur due to the systems normal functioning. Well, the amount of water first that the system can handle will be determined by the porosity and profundity of the soil, (i.e. depth and quality of markets); the maturity of the system, (i.e. the capacity to utilise the available liquidity). Under an abundant liquidity scenario, with plenty of energy in the system - in the case of forest trees - water is pulled through the vegetative mass due to evapotranspiration, leading to humidity, which in the form of clouds move along the gradient from high humidity to a low humidity area. This humidity transfer generates air currents which dry the leaf surfaces of the plants inflating the requirement for liquidity per unit of productivity.
When excessive liquidity is added to the system it needs to be drained. The process and velocity of the drainage depends on the structure of the soil and the topography of the land, amongst other factors. When the land is flat and the soil deep and well formed, it slowly drains into rivers: when the topography is variable, and the soil shallow/mottled/gleyed, surface run off occurs and ends up in lakes/swamps or what might be known in the financial world as reserves. These lakes slowly and over time go through the process of succession, as I outlined in a previous post, following the r-k continuum until they build up eventually into a mature forest. It is a slow process. Needless to say, the topography is partially determined by the nature of the drainage system and the stresses under which it undergoes.
One such stress is a flood. Most people think that rivers carve their banks. This is partly true. More typically when a river floods, it seeps through the pores of the soil and whilst the flood holds causes no damage, merely placing productive growth of the forest on hold. The real damage is actually caused by the draining away of the flood, a process that cannot be avoided, and nor should it be, for if the flood lasted it would destroy a much greater area and the productive potential of the forest. Yet nonetheless damage occurs.
Then the dry season arrives, and those “r” species that have reached their maximum extent and are about to be shaded out by the much slower growing, more stable, more shade bearing “k” species, give way. A kind of “creative destruction”, so to speak.
As for what happens during an el nino, well for that, you’ll have to watch the news.
As Stormy tells it, a great deal more can be said, but enough for now.
PS. Nobody should pay such an environmental cost, whether china, the US or Europe. But that’s understood by all… you’d figure.
Stormy: China won’t “succeed” at what? Won’t become a bigger economy than the US? Won’t develop a military that ultimately will dwarf that of the US? Won’t push the US out of East Asia? Won’t become the overwhelmingly dominant power in Asia and finally in the world? Won’t become the center of the world economy, eventually? You may not live long enough to see all this take place, but it will, have no doubt.
Guest,
Will not succeed in meeting the objectives in its timetable. In the context of the piece, I thought that was clear.
Have you acquainted yourself with that timetable? I gave you the links.
Thanks for the links, Stormy. Have yet to read the reports, but I agree with the sentiment expressed in the posts.
It’s a stupid question but what are the projections for a US recessionary impact upon inflows into asia, mainly china and the resultant impact on asian investment in treasuries. Rogoff’s piece in the FT was rather generalized but begs the old question, should china drastically cut investment in treasuries, who’s gonna carry the load? Hard to see Japan or even Europe really stepping up with any real enthusiasm.
An asian slowdown may add momentum to a potentially unhealthy US economy. Would Roubini’s doomsday scenario be further complicated?
Stats or theories anyone?
If China slows, its trade surplus would likely rise and its demand for US debt would likely remain high, in part b/c it would resist further rmb appreciation. remember, the current account is the balance between savings and investment, and the most obvious source of slump is a fall in investment.
moreover, there isn’t really good evidence of a fall in chinese demand for treasuries — someone is adding to their accounts at FRBNY, and china likely accounts for a lot of the purchases through London and thus the rise in uk’s recorded treasury holdings (i discussed this in an earlier post). chinese holdings of all us debt — including agencies — are still going up fast.
if a major fall in treasury demand from central banks materialized, i won’t keep it from you — but right now, i don’t think it is a huge risk. Central banks have a ton of cash to invest.
that has allowed the bank of japan and the bank of korea to shift away from treasuries at the margin without moving the market.
Stormy says:
The end result will be that both will trip clumsily and fall all over each other in a heap…unless both change their ways. Unlikely…until each is absolutely force to.
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How is this “not meeting its timetable”? In fact, I don’t understand the economics of “fall all over each other in a heap.” Can you quantify that a bit? Put it in “economic” terms?
I’m reminded of an old Peanuts punch line:
“No problem is so big or so complicated, that it can’t be run away from!”
Chinese poised to make bigger overseas acquisitions to secure natural resources, technology
http://www.guardian.co.uk/feedarticle?id=7282361
HONG KONG, Feb 5 (Reuters) - Emboldened by recent success and backed by Beijing’s deep pockets, an increasingly sophisticated China Inc is poised to make bigger overseas acquisitions in its quest to secure natural resources, technology and prestige.
State-run Chinalco’s $14 billion swoop on Friday for a chunk of global miner Rio Tinto in China’s largest foreign investment was funded by a state policy bank and underscores the ambition and financial might wielded by Beijing.
It affirms China’s ability not only to identify deals, but to complete them — something mainland firms have not always managed to pull off. Settling for minority stakes shows a recognition of political realities abroad and management limitations at home.
“The government has for several years had a policy called the ‘go out’ policy, in which Chinese companies are encouraged to do outbound M&A. Until now it’s been more talk than action. Now you’re finally starting to see real signs of activity,” said Philip Partnow, managing director at UBS Securities in Beijing.
Outbound deals from China last year nearly doubled to $29.5 billion, according to Thomson Financial. The biggest was Industrial and Commercial Bank of China’s US$5.6 billion investment in South Africa’s Standard Bank.
While China’s biggest companies are state-run, observers say Beijing tends to exercise its influence by setting strategic goals rather than picking acquisition targets. The companies have autonomy, but need government approval before making a deal.
If the US slows, its current account deficit will fall.
Somebody else’s current account surplus must fall in conjunction.
If not China, who?
Stormy, still here?
Character is destiny. Very good answer. Good illustration of the contest to command economies too and the different approaches to competition.
But the illustration you have used to describe the Chinese character is a bit flawed. The Chinese do not believe in one party rule. China is the most anarchistic place I know. “The mountains are high and the emperor is far away”. The door has opened just a bit and everything and everyone is pushing it to maximum advantage. They are individually the hardest working most competitive people I know. The success of any one individual or group of individuals may not be central to central planners, but it does seem to be central to individuals. It is not Japan with that terrific loyalty/adhesion to the hierarchy. And perhaps that’s the basis of the social instability Charles Steele wrote about. You’ve seen it written before. The number of protests in such-and-such province, etc.. That social/political problem seems the most disconcerting internal problem for the moment, IMO. And I’m convinced it seems so to the leadership. The environmental issue is secondary but exacerbates it. It’s hard to imagine, at least from our western perspective, that China or India can build industrial economies on the basis of the automobile. We would leverage that labor differently.
I don’t see it ending well either and have been trying to understand the economics. Economic imbalances yield social imbalances. We export opportunity, but it doesn’t find it’s way to where it’s needed; a misallocation of resources. Again, that’s my western view.
Yes, imbalances will be corrected. Or, lead to different ones. And the magnitude of those imbalances - like contemplating stars.
- jd -
calling Brad, DC and Twofish
Re: Report: China to block Citigroup sale
http://www.businessweek.com/ap/financialnews/D8U5M7TO0.htm
In your opinions, to what extent, if any, did blocking CDB’s Citi investment have to do with public diapproval of Blackstone and Morgan Stanley?
Guest,
Below is part of the story…
China figures that its about 100 years behind the U.S. in development. It is playing catch-up.
By 2020, China expects to be the world’s factory—exactly what we are seeing. The question is: Whose factory? And who buys the goods? Who really makes the goods?
By 2050, China expects the minimum monthly wage to be $1300 (measured in 2002 U.S. dollars). To achieve this, GDP has to maintain a 9% growth rate. Even those who laid out the plan admit that there is only a 6% chance of this goal being achieved. Do you really think that China can maintain a 9% growth rate?
I am not convinced that development can proceed in this lopsided fashion, i.e., becoming a massive export platform for finished goods. According to Chinese authorities, over 60% of those exports are FDI driven…in some areas as high as 80%. Our trade deficit with China has been created in large part by our own multinationals: outsourcing, subcontracting, off shoring…whatever. Indigenous Chinese firms are in the back seat—FDI enjoy a 2-1 advantage in taxation. Think of that for a minute. Give a multinational a 2-1 tax break; then try to compete with them. Additionally, China gave additional tax advantages to all exported goods. Granted, the tax code is changing…but you have given the multinationals/foreign firms a good head start. Foreign firms now in China will enjoy a five-year grace period from the time the new tax law goes into effect (2008). In short, indigenous firms will be at a disadvantage for another five years. Foreign firms deliver approximately 21.9% ($795 billion) of China’s tax total revenue, according to the OECD. Again, according to the OECD, the new tax law will actually increase the revenue of foreign firms over indigenous firms.
http://www.oecd.org/dataoecd/20/12/38309228.pdf
Growth has to be more “organic.” Consumption and production have to grow together. Production cannot be so heavily in the hands of foreign nationals. Nor can such massive discrepancies—trade and balance of payments—exist between you and your customer.
In relying on consuming nations to buy those goods—primarily manufactured by our companies—China is now intimately connected to the fortunes of the U.S.
jd,
good point
where would the adjustment come from –
well, russia’s surplus is down despite higher oil, and generally speaking, as soon as oil stabilizes, rising spending/ investment should bring down the commodity surplus (and increase china’s surplus).
other points of adjsutment — bigger deficit in europe as whole, whether the eurozone or eastern europe/ uk and smaller surplus/ bigger deficits in non-china emerging asia.
no clue on CDB. Suspect performance of Barclays also might have played a role, along with a general sense that the CIC/ state banks were getting a bit too exposed to the US/ European financial sector. But i really have no idea.
I doubt China is as dependent upon the US as you think. It exports to many other nations too, more actually to the EU than to us. And it can take measures to stimulate internal demand when it chooses to do so. I think Americans, as a last resort to bolster their flagging egos, tell themselves “well China may be out-pacing us in growth and almost everything else, but we are essential for that; it can’t do without us.” Well I think we may be surprised at how well it can do without us as time goes on.
http://www.businessweek.com/globalbiz/content/feb2008/gb2008025_188402_page_2.htm
The Chinalco purchase of a Rio Tinto stake is just one of a flurry of deals by Chinese companies buying resources overseas. Companies are buying because they want to lock in a stable supply of raw materials needed to fuel China’s high-powered growth. Beijing, meanwhile, is encouraging this overseas shopping spree to help reduce its excessive foreign exchange reserves, which are $1.5 trillion.
Last year, for example, Zijin Mining Group, a Hong Kong-listed company based in the southeastern province of Fujian that in 2006 earned $236.8 million on $1.5 billion in sales, took a controlling stake in London-based Monterrico Metals, which has extensive gold, silver, and copper resources throughout Peru, for just under $190 million. And on Jan. 31, a subsidiary of Shougang, the Beijing-based company that is one of China’s largest steelmakers, bought a 19.73% stake in Australian iron ore miner Mount Gibson Iron for close to $363 million. The deal is still awaiting regulatory approval in Australia.
Meanwhile, on Feb. 4, shares in Australia’s iron ore producer Fortescue Metals Group shot upward following unconfirmed reports that the company was in talks with potential Chinese investors interested in taking a large equity stake. Chinalco too is already active in Australia, with a $2.5 billion investment it made in 2006 in a bauxite mining and aluminum smelting project in the Aurukun region of Queensland—the largest investment Down Under by any Chinese company.
I’m not Brad, DC or Twofish but I do follow China. And my take is that the central authorities in China just liked Blackstone and Morgan Stanley better than they liked Citi. They may have had some issues with the leadership at Citi.
Guest: China won’t “succeed” at what? Won’t become a bigger economy than the US?
This is likely as China will need a larger economy to have even a fraction of the US standard of living.
Guest: Won’t develop a military that ultimately will dwarf that of the US?
I don’t think that this is likely if current Chinese policies continue. The only point of a Chinese military is to be able to deter the US from intervening in a Taiwan situation, and there doesn’t seem to be much of a desire to develop the PRC military beyond this.
Guest: Won’t push the US out of East Asia?
Assuming that the Taiwan situation can be resolved, why would China want to see the US out of East Asia. The US does a wonderful job keeping the Japanese on a leash.
Guest: Won’t become the overwhelmingly dominant power in Asia and finally in the world?
Very unlikely. As China rises so will India, Russia, Japan, and the ASEAN states. China geographically cannot behave in the way that the US does, because unlike the US which is not surrounded by strong independent powers, China is.
Guest: Won’t become the center of the world economy, eventually?
Doubtful. There are too many things going on. Beside global hegemony is fleeting. In the unlikely case that China does dominant the world, this will only last a century or two before everything falls apart.
Guest: You may not live long enough to see all this take place, but it will, have no doubt.
I don’t think it will happen. There is a strong sense of Chinese nationalism and a desire that China be a great power, but there is no sense amoung Chinese to crave power beyond that and become a world hegemon. Power doesn’t not come without costs, and unless something really big changes, I don’t think that there is the appetite for spending the amount of blood and treasure that it would take to rule the world.
And besides, empires are fleeting….. You can’t live forever, but you can have people say nice things about you after you are gone.
Guest: In your opinions, to what extent, if any, did blocking CDB’s Citi investment have to do with public diapproval of Blackstone and Morgan Stanley?
It’s not clear that there ever was a real deal in the works. Also the Morgan Stanley deal was structured to avoid the specific problem with Blackstone. CIC didn’t buy MS stock directly, but rather bonds that will get converted to MS stock in a few years, which will avoid screaming if MS stock goes down due to short term moves.
Since the us fiscal deficit is a small part of the us deficit current acount, and considering that the us treasuries and bills are about 4 billion (13 zeros), it seems that at this rate of reserves accumulation by superavitary countries there will be no more treasuries to buy. I wonder who wants to buy us corporate bonds or any other mezzanine structured products to lose money either by us dollar depreciation o by increasing default rates. How will usa manage to finance its deficit if its securities are seen as toxic? Dont know the answer but the day we see usa issuing bonds in yens , yuans, euros, I think will know that the us dollar hegemony has capitulated
the use of the categories “united states” and “china” leads to neat but false conclusions. suppose that china bought into wall street firms that contribute heavily to election campaigns ? this has begun already, but suppose that it went further ? would the ordinary voter on main street feel oppressed by china ? or by wall street ? or would the investors also have bought into media corporations to tell the ordinary voter what to feel ?
in a bretton woods iii integrated and thoroughly globalised world, the definitions of who are the main actors might also change.
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gillies — methinks the government of china is becoming a bigger actor in an integrated and globalized world than before. one interesting question: suppose a wall street firm partially owned by China is contributing to candidate China dislikes .. unlikely now, given that wall street is the most pro-china constituency in the us, but not totally impossible. it is a bit easier if China just invests in firms that support candidates china likes … w/o there any real guidance.
as for running out of treasuries, well, the fiscal stimulus reduced that risk considerably. plus central banks still don’t own as many agencies (or as big a share of the agency market) as the treasury market, and then there are equities thru SWFs.
bsetser: it is a bit easier if China just invests in firms that support candidates china likes … w/o there any real guidance.
It’s a bit more complex than this. It’s generally illegal for a corporation to contribute money to a political candidate, so a Wall Street firm, simply can’t give money directly to a politician.
However, what happens is that the management and employees of the firm can and do form a separate political action committee which is separate from the firm, and then voluntarily contribute money to the PAC in their personal capacity. You don’t have to twist arms to get people to contribute money, since people are well paid on Wall Street, and see having access to politicians as useful for keeping themselves well-paid, so when the tin cup goes around, it’s not hard to get donations.
This might seem like a legal loophole, but it does make it difficult for any outside third party to tell a corporation “contribute money to X or else” since the corporation can’t directly contribute any money at all, and it can’t force people to make those contributions. It’s also really transparent. You can go to the Federal Election Commission website, and see who the PAC’s are and how much money they give to whom.
The other point about political contributions is that they only have limited impact on the election. A candidate who has lots of money but no ideas is not going to win an election. What political contributions does get you is access. If someone was responsible for $100,000 in donations, you are going to return their phone calls, and getting your phone calls returned by a politician is not a small thing. The result of this is that in a lot of contested elections, a PAC will contribute money to both candidates running. PAC’s will also contribute to candidates that they don’t like in order to get their phone calls returned.
One other interesting thing is that Wall Street PAC’s tend to contribute to Democrats more than Republicans.
The other point is that the Chinese government has found out that when it tries to directly influence political decisions, things usually backfire, and it no longer really does so.
What it has done in Taiwan, Hong Kong, and the United States is to arrange things so that local people have interests that are aligned with Beijing and then relying on their judgment about how to promote those interests. The communications works both ways since business people in those areas have a lot of influence on Beijing’s decision making process and actions since local people know how things are done locally and can keep Beijing from shooting itself in the foot.
corpis on 2008-02-06 14:49:44,
The US has already issued foreign currency bonds when the dollar was weak:
http://en.wikipedia.org/wiki/Carter_bonds
Have a look at the link to the 1979 Time article. It is uncanny how similar times were then - rapid growth in reserves, powerful oil producers, rising gold price etc. The fact that such episodes have been repeated (another in the late 1980s / early 90s), with different countries on the other side is one reason why I think the US should look to its own policies before complaining about China.
The US came back from the 1970s crisis, but it took a dose of Volcker to sort it out. Right now, I see no sign that the US has the guts to to go through that redemption process again.