Finance as foreign policy
The Financial Times seems to have found an obviously non-commercial investment by a sovereign state. And it didn’t come from a sovereign fund.
China’s State Administration of Foreign Exchange seems to have discovered that generating diplomatic returns is easier than generating financial returns. Jamil Anderlini of the FT:
In January this year Safe bought $150m in US dollar-denominated bonds from the government of Costa Rica as part of an agreement signed last year under which the Central American nation cut diplomatic ties with Taiwan (after 63 years) and established relations with the People’s Republic of China. The agreement …. explicitly links the foreign policy switch to China’s purchase of $300m in government bonds and a grant of $130m. In an exchange of letters from January this year between Fang Shangpu, Safe’s deputy administrator, and Costa Rica’s finance minister, Safe promised to buy government bonds under the terms of the 2007 agreement, but included a clause demanding Costa Rica take “necessary measures to prevent the disclosure of the financial terms of this operation and of Safe as a purchaser of these bonds to the public”.
China has long been willing to assist countries that refused to recognize Taiwan. But it generally hasn’t used its central bank reserves to do so. But if a country already has way more reserves than it really needs, well, it has new options. Anderlini:
“The purchase of US-denominated Costa Rican government bonds by China’s State Administration of Foreign Exchange (Safe) is the clearest proof yet that Beijing regards its $1,800bn in foreign reserves – the world’s biggest – as a tool to advance its foreign policy goals, as well as a potential source of income.’
I was particularly interested in the FT’s story for two reasons:
One, it suggests that SAFE is now something more than a traditional reserve manager. Investing in Costa Rican bonds and investing in equities (I suspect SAFE has a US equity portfolio, not just a British and Australian portfolio) are both signs that China believes it has more liquid reserve assets than it really needs.
Two, evidence that the world’s biggest creditor country is throwing its financial weight around should increase interest in my new Council on Foreign Relations Special Report which examines – or tries to — the strategic implications of the world’s changing balance of financial power.
It is a big topic, and it is a big paper. I won’t try to summarize it fully here.
But one of the core arguments in the paper is that countries with lots of foreign assets do have options that are often not available to countries that have large foreign debts. Another is creditor countries are, at least on occasion, able to influence the policies – foreign as well as economic policies – of the countries that rely on them for credit.
A government’s ability to borrow big sums in times of need is an important strategic asset. Nial Ferguson’s work on Britain’s rose has made this clear.
But relying heavily on fairly small number of governments for large amounts of financing can also be a strategic vulnerability.
That though isn’t how the US typically thinks about its ability to place quantities of dollars at low rates with the world’s central banks.
The dollar’s status as a key reserve currency has traditionally been considered an unambiguous strategic asset for the United States. Central banks need reserves to guarantee their countries own financial stability – and in some sense they traditionally have needed to hold dollars far more than the US has needed other countries to hold dollar reserves. The asymmetries favored the United States. The US lived in a world where it didn’t need to hold reserves – and could count on other central banks’ need to add to their reserves for a (limited) supply of financing on very favorable terms.
I worry that this may no longer be the case. There is growing evidence that the countries now adding to their reserves most rapidly already have far more reserves than they need. The US runs the risk that it may be in a position where it needs other countries to add to their dollar reserves more than other countries actually need additional dollars. That potentially shifts the strategic calculus.
China’s willingness to link its willingness to buy Costa Rican bonds to Costa Rica’s “one China” policy is an example. China wouldn’t be as willing to buy less liquid Costa Rican dollar bonds (in the right circumstances) if it wasn’t convinced that it already has all the liquid dollar-denominated bonds it needs.
I’ll have more on my paper later. For now, though, I would be remiss not to note the FT’s leader – which calls for more transparency from central banks as well as sovereign funds, and also calls for China to adopt policies to reduce the pace of its foreign asset growth.
Safe’s dealings with Costa Rica do, however, demonstrate potential dangers. These show that it is ready to invest as a means of applying political pressure. They are also a demonstration of the great lengths to which Safe is willing to go in order to hide its positions. It is an opaque institution, without open oversight of its assets or objectives.
As with most other sovereign wealth funds – as well as some publicly owned companies and even some individuals enriched by petrodollars – not enough is known about Safe to be sure it could meet a serious “fit and proper persons” test for control of companies abroad. ….
China must realise that its ballooning foreign reserves are a problem. It should allow the renminbi to appreciate further against the dollar, reduce its current account surpluses and, above all, relax capital controls to allow private investors to invest abroad. It will be far easier for the rest of the world to absorb Chinese capital if it does not come wrapped up in ownership by the mighty Chinese state.
I agree. China financial integration with the world generates friction precisely is comes with the mighty Chinese state.
Indeed, I would argue that FT’s leader understates the challenge posed by the exceptional pace of China’s foreign asset growth. In addition to adding $476 billion to its foreign exchange reserves between June 2007 and June 2008, China added $205 billion to the central banks “other foreign assets” – bringing its total holdings of foreign assets to a little over $2027 billion. This isn’t a secret. The supporting data appears on the PBoC’s balance sheet (look at the fourth line from the top; the 2008 data is only available on the Mandarin site). Of course, some of the $680 billion increase in the PBoC’s foreign assets reflects the euro’s rise over this period. But around $600 billion of the $680 billion increase was real – and that total leaves out the funds moved to the CIC and the funds the CIC injected into the China Development Bank.
Unless there are far more fundamental policy changes, China will continue to accumulate very large quantities of foreign exchange – and, since it already has more dollars that it needs, it also has the capacity to use its reserves in creative ways.
Certainly seems that’s the way things are going, but Japan was taking over the world once too, and then the G7 ganged up on them and enacted the Plaza Accord.
Europe has never been as as big a fan of globalization and non-protectionism as the US. I can easily seem increasing import tarrifs as retaliation for currency pegging, especially as their economy weakens and they think it might be good to keep their domestic market for eurozone manufacturers.
Blashpemy, I know, but I still think it could happen there.
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Not so sure this is remarkable. PRC buys UN votes in competition with the ROC. And the state agency for FX acts as its international banker. It is a bit like the US lending and granting to an LDC in the days of the First Cold War. The US would call it development assistance, which it well may be, both in the Chiese and the US case. Very few serious observers without a stake in the development business believe that government to government transfers actually assist in development, but they are a useful foreign policy tool, and Development Assistance has a nice ring about it for the do-gooders back home. Nothing wrong with that and unremarkable. Unless one has a unrealistic view of either central banking, exchange rate management or foreign policy, or government in general. Or adopts a mainstream economics perspective.
Just read “What Does China Think?” by Mark Leonard. Mr. Leonard tells how the Chinese strategist a while ago concluded that China cannot challenge the USA by military means. Instead, it should use “soft means of war”, namely cultural, financial, and trade related.
China’s strategy is doing fine. They are now strong enough financially, that their opinion/threats make a difference in the politics of the USA, not to speak of smaller debt-ridden countries.
Funny thing is that the USA cannot do anything at this. It is becoming more and more dependent on China by the day.
China’s manufacturing sector still booming ahead. Growth has moderated, but industrial production is still rising for now. August production grew 12.8 percent, as per Associated Press business wire.
http://biz.yahoo.com/ap/080912/china_economy.html
August’s industrial output grew 12.8 percent over the same period last year, the National Bureau of Statistics reported. That was 1.9 percentage points below July’s growth rate and 4.7 percentage points below last August.
Analysts have cut forecasts of China’s economic growth this year to as low as 9 percent, down from last year’s stunning 11.9 percent. That still would be by far the highest growth for any major country. Retail sales in August rose 23.2 percent over the same time last year, the statistics bureau said. It said that was 6.2 percentage points above last August’s growth rate.
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“There is growing evidence that the countries now adding to their reserves most rapidly already have far more reserves than they need.”
I see 3 types of rigidity that have contributed to the surplus CB liquidity problem globally:
a) CA rigidity via inappropriate FX pegging
b) Concentration of dollar assets in the relatively few number of surplus countries
c) Socialization of net foreign dollar assets – i.e. bloated CB reserves
Correspondingly, there should be 3 escape valves for the current build up:
a) CA adjustment via FX adjustment
b) Diversification of dollar assets within countries that are currently concentrated, resulting in a broader global distribution of dollar assets
c) De-socialization or privatization of net dollar assets – i.e. spreading of dollar assets from CBs to the foreign private sector
In contrast to Setser who “worries” about this, I welcome the fact that things may be changing to the disadvantage of the US. Perhaps being the biggest debtor nation, as Roubini has pointed out, will now lead to the decline of its empire: something in my view long overdue. The US ought to be liquidating its empire and its excessive commitments around the globe. Liquidate, consolidate, shrink and focus on setting its own house in order.
A footnote to the above article. While the macroeconomic statistics for the Chinese economy look good, small labor-intensive manufacturers are being hit hard with an estimated 70,000 toy and textile manufacturers closing in the Shenzhen region across from Hong Kong.
Ironically, during the past decade, Shenzhen’s export sector boomed while China’s heavy industrial heartland withered. Now there is a reversal of fortunes, with the capital intensive, state-owned heavy industrial sector that is booming with the privatized labor intensive industries shriveling.
China State Shipbuilding, Changchun railway car, Xian Aircraft, Chengdu Aircraft, Shenyang Aircraft, Harbin helicopter, Wuhan Steel Corp, Datong locomotive among others, have record order books from domestic state orders and foreign exports to developing nations across the Middle East, Africa, and Southeast Asia. Entire national railway networks across Iran, Saudi Arabia, Libya, Nigeria, Venezuela, Kazakhstan, Congo and Angola are under construction by state-owned China Railway construction corp.
At a fraction of cost, the medium-high technology Chinese industrial products are alot less expensive to developing nations around the world than Western products, and the quality control of Chinese products now is only slightly below Western and Japanese levels. Chinese products are actually more appropriate for the requirements and conditions in developing nation states that require basic infrastructure.
Today, China exports advanced technology satellites to Venezuela and Nigeria, Naval Missile Frigates to Pakistan and Thailand, Diesel-Electric locomotives to Cuba, Turboprop passenger aircraft to India, K-8 trainer jets to Egypt, anti-ship missiles to Iran, and some of the world’s most advanced Fiber optics and wireless communication systems to British telecom.
LOL to the Washington Consensus elites who think China is just a passing fad that can be isolated by the US Treasury controlled IMF and G7. US Defense-security regulations that severely restrict high-tech exports to China have backfired resulting in global loss of competitiveness for American industries.
The SAFE might want to be slightly more cautious about throwing its weight around. As someone pointed out on this blog as few months ago, excessive reserve accumulation to manipulate the balance of payments violates Article IV of the IMF Agreement. If the PRC insists on using its reserves in violation of its treaty obligations, then the rest of the world needs to reconsider whether the PRC should be allowed to partake of the benefits of the global economy(including the tarriff restraints of the WTO). There are plenty of countries in the developing world who would be thrilled if, for example, the West imposed a 50% tarriff on Chinese textiles and other consumer products that can be produced in other countries and are not used as components for re-export.
“There are plenty of countries in the developing world who would be thrilled if, for example, the West imposed a 50% tarriff on Chinese textiles and other consumer products that can be produced in other countries and are not used as components for re-export.”
LOL to the Western powers to obtain the cooperation of developing nation states to gang-up against China. In the developing world, China is viewed as a counterbalance to the US Treasury controlled IMF regime that demands austerity programs for the poor and asset sales of national resources to Wall Street banks. At least the Chinese don’t invade foreign sovereign nations with military force for their energy reserves. The West did absolutely nothing for the past century to assist poverty across Africa. In the past decade, due to Chinese FDI investment into Africa and infrastructure development, the entire African continent is experiencing the fastest economic growth in history. The Chinese economic model works equally well in Africa. Economic growth is the best anti-poverty solution.
From China Daily,
http://www.chinadaily.com.cn/china/2008-09/12/content_7020656.htm
China, which holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt, may cut the portion held in US dollars, according to China International Capital Corp (CICC), one of the nation’s biggest investment banks.
The US government this week seized control of the two mortgage-finance companies, which account for almost half of the home-loan market in the world’s biggest economy, to prevent defaults from crippling them. China holds up to $400 billion in the two firms’ debt, CICC Chief Economist Ha Jiming said in a report Thursday.
“The crisis has made Chinese officials realize it’s a bad idea to put all their eggs in one basket,” wrote Hong Kong-based Ha. “This will likely lead to greater diversification of foreign exchange reserve investments.”
Hooray!
The bailout has guaranteed them a good exit price.
the CICC’s chief economist puts china’s $ share at 60%, and his analysis seemed pretty good from what i read (i.e. he used the tic data correctly). I wonder if anyone who reads this blog has any views on this? i.e. is he right? My last estimate was 65-70% with a bias toward 65% but I wonder if I may have underestimated chinese diversification since mid 06 (the june 06 survey suggested no diversification from mid 04 to mid 06)
JKH — I agree, and recommend policies that would aim to achieve those results in the report. the question tho is how to get there; sovereign countries make their own policies and right now china seems keen on policies that result in major asset growth.
I dont understand the widely held belief on this blog that the US is in a major decline. If anything it seems the rest of the world is DESPERATE to create jobs and better lives for there people, but lack the creativity or the know how. Why does China not have a domestic economy? Because its a threat to the communist party and it doesnt doesnt have a clue how to create a consumer culture. Therefore it continues to waste away its peoples savings subsidizing US consumption.
Dr. Setser,
The most likely way to convince China to revalue the RMB is through a mixture of polices that will both make adjustment easier for them while at the same time increasing the costs of attempting to manipulate their currency.
As Mr. Richman noted here a while back, GATT Article XII does allow for emergency trade controls to safeguard the balance of payments (such as the textile tariff I mentioned above that would revive the dispersion of textile production). If the threat of such measures was combined with an offer of methods to help facilitate RMB it could produce the desired outcome.
One such measure would be to conduct a general refinance of Less Developed Country debt through the IMF’s resumption of allocations of SDR and the SAFE’s purchase of those SDR’s from Emerging Economies to repay their debts. The result would be that China would be able to diversify its currency risk somewhat while the LDC’s would know be paying interest at the SDR interest rate which is extremely low. There are no doubt other measures that could be used (aside from the obvious “use the currency hoard to build better health and education systems” that seems to the so unpopular with the State Council), but these could serve as a start.
Butts: The rest of the world needs to reconsider whether the PRC should be allowed to partake of the benefits of the global economy(including the tarriff restraints of the WTO)
That would have been a credible threat in 1985 or maybe even 1995. However, China today is so integrated into the world economy that even trying to disconnect it is like cutting off your own left foot. It would be so disruptive and so against people’s financial interest that it is not a credible threat. This is one way in which the world has changed between 1998 and 2008.
Butts: There are plenty of countries in the developing world who would be thrilled if, for example, the West imposed a 50% tarriff on Chinese textiles and other consumer products that can be produced in other countries and are not used as components for re-export.
Two problems:
1) the first is that most of the people in the developing world are also interested in selling resources to China
2) the bigger problem is that outside of neo-conservative defense hawks, no one in the West is interested in slapping tariffs against China if it means more imports from another country. People that want to slap a 50% tariff against China want to slap a 50% tariff against everyone.
Shrek — China should know how to stimulate domestic demand/ create jobs domestically. Fiscal stimulus on a large enough scale usually works. That though isn’t seen as virtuous, while subsidizing exports is — it strikes me more as a function of a policy choice than as a function of a lack of know-how.
Any thoughts on the more political science type questions I raised in this post, and which China’s purchase of CRica’s debt seem to raise?
shrek: I dont understand the widely held belief on this blog that the US is in a major decline.
I certainly don’t think that the US is in a major decline in absolute terms. However I do think that the US is in decline in *relative* terms. The basic situation is that in 1991, the US was so overwhelmingly powerful relative to other nations that as China, India, Russia, and Europe rise, that the US has less influence *relatively* speaking.
shrek: Why does China not have a domestic economy?
It does. The problem was that in the 1960’s and 1970’s, the Communist Party was so incredibly economically incompetent that just getting China to the point where it has normal growth creates a huge increase in wealth.
shrek: Because its a threat to the communist party and it doesnt doesnt have a clue how to create a consumer culture.
Hardly. The policy of the Communist Party is “get rich and shut up.” The fact that China is consumerist is what has kept the Communist Party in power, because people who want to shop in shopping malls aren’t the type of people that will selflessly give up their lives to fight against political oppression.
Bread and circuses. That’s how the government elite keeps themselves in power in the US, and that is how the Communist Party is keeping itself in power.
shrek: Therefore it continues to waste away its peoples savings subsidizing US consumption.
It’s probably not a waste since the US is so economically strong that a real estate bubble is a minor annoyance rather than a catastrophe.
Also PRC and Taiwan seems to have agreed to a diplomatic truce to suspend fighting over third world countries. Paraguay has not switched relations, and at this point anyone switching relations would give Ma Ying-Jeou a serious black eye, which works against PRC interests.
Off-Topic, Perhaps a China PLA Astronaut will plant a Red Flag on the Moon in 2020. LOL.
China counts down to SZ-6 space launch on September 25th at 9:10 PM
http://www.reuters.com/article/scienceNews/idUSPEK35483520080912
BEIJING (Reuters) - China is counting down to 9.10 p.m. (9:10 a.m. EDT) on September 25 for its third manned space flight that will include a space walk, local media reported on Friday.
I agree with most of what you are saying two fish. The next five years should be very interesting to say the least. With commodity prices collapsing and the ROW still supporting this system. Interest rates in the US not rising, I cant help but believe that the US consumer will come out a lot better than the chinese or the rest of the world. I guess thats the choice they made by buying dollars. I expect china to have a crisis at some point
Beau Butts: . If the threat of such measures was combined with an offer of methods to help facilitate RMB it could produce the desired outcome.
Only if those threats were credible which they are not. The US is too much indebted to China at this point to make any sort of threat, trade or otherwise. Andrew J. Bacevich has recently written a book on the limits of American power, and the basic problem with US foreign policy is that the US has conducted foreign policy assuming that it had infinite military and economic capacity which it does not.
To conduct this foreign policy, it has had to borrow extensively and those bills are coming due (literally). With the US needing Chinese support to prevent economic and military collapse, the United States is just not in a position to make threats.
“Why does China not have a domestic economy? Because its a threat to the communist party and it doesnt doesnt have a clue how to create a consumer culture.” - Shrek
Oh please,
China to become top Asia consumer market
Published: Sept. 9, 2008 at 1:07 AM
http://www.upi.com/Business_News/2008/09/09/China_to_become_top_Asia_consumer_market/UPI-74441220936871/
BEIJING, Sept. 9 (UPI) — China, with a per capita GDP of $2,456, will become Asia’s largest consumer market by next year, ahead of Japan, Commerce Minister Chen Deming said Monday.
“As one of the world’s fastest growing consumer markets, China is a world leader in mobile phone sales, domestic tourism, and broadband network penetration,” he said.
Chen said China’s annual consumption has grown an average of 13 percent in the past five years. He said if the growth rate continues even at 10 percent, China’s consumer market will exceed $4.38 trillion by 2020.
The minister predicted China will top the global luxury market by 2014, with a market share of 23 percent, and by 2015 the country may become the world’s fourth-largest provider of outbound tourists, the report said.
I just fail to see what is the problem in SAFE’s investment in that Costa Rican bonds to win some diplomacy.
I mean, it is not like China invents such activity and trade off between money and politics. Looking back at the world history, there is no shortage of evidences that countries, west and east alike, had used money to buy allies all over the world and across the period. The only thing here is that China now has more money to spend this way, actually China had done this kind of thing for decades too, just as everybody else.
SAFE is just an entity to carry out the transaction. Does it matter who spend the money? And I am not a Latin American expert. Maybe the investment made really good business senses. Is Costa Rican a booming area? Someone should know.
“Only if those threats were credible which they are not. The US is too much indebted to China at this point to make any sort of threat, trade or otherwise. Andrew J. Bacevich has recently written a book on the limits of American power, and the basic problem with US foreign policy is that the US has conducted foreign policy assuming that it had infinite military and economic capacity which it does not.
To conduct this foreign policy, it has had to borrow extensively and those bills are coming due (literally). With the US needing Chinese support to prevent economic and military collapse, the United States is just not in a position to make threats”
This makes no sense at all. The chinese have built there economy around supplying the US unlimited credit. if the interest rates in the US were going through the roof in the US i would be worried thats not whats happening. China is going to sit on its useless fx reserves because its accumulated more than the US could ever repay. Whos fault is that? China’s. Private investors wouldnt have do it
Brad, your blog is aptly entitled “Follow the Money”. What do you expect Costa Rica do? Comrade Lenin once famously said that a capitalist will sell communists the rope to hang another capitalist. All capitalists, foreign or domestic, are following the script. Chinese rulers have found that it is far better to let capitalists compete with each other, rather than physically eliminate them for a Western ideology known as communism. After all, China is known to be very successful in assimilating foreigners, from Genghis Khan to the Manchu. The process of assimilation through globalization should be more impressive, with the help of some very capable individuals such as Comrade Paulson. Violence has never been a particularly good skill of China. Once China secured peace with the offsprings of the Vikings and Crusaders, China will do what it does best – assimilation. You don’t imagine that China is buying the US fiat to help the capitalists fund their own welfare party. At $0.7 trillion a year and growing exponentially, China’s pocket will grow too big even for Comrade Paulson’s welfare state of the superrich. When China starts to spend, rather than invest in US fiat, the world will feel the difference. If I say that people will be pleasantly surprised, nobody will believe me. You cannot expect a conqueror to trust any non-violent means of conversion.
VP Sarah Palin says she would demonstrate US military power against Russia and China. War on Russia over Georgia? War on China over Taiwan democracy? The Pentagon Neo-nuts have difficulty even controlling Iraq or Afghanistan.
If the US Neo-nuts were to try to contain Russia, former KGB chief Putin could launch countermeasures that would easily pull the rug out from under the entire US economy. In the past, the United States could spend the Russians into oblivion as it did with Star Wars, but no longer.
For instance, by restricting the export of its oil or natural gas, Russia has the ability to create a global energy shock. Russia is also in possession of hundreds of billions of dollar reserves, which it can sell into the market at any time.
VP Sarah Palin knows nothing about foreign policy! Unfortunately, she will probably be President given McCain recurring cancer problems. A Black president will never be elected with so many closet racists. LOL.
shrek: The Chinese have built their economy around supplying the US unlimited credit.
China and the United States are in a situation of mutually assured financial destruction in which either side could destroy the others economy at the cost of destroying its own.
This is a very different situation than in 1985 or even 1995, when the US could have taken unilateral action against the Chinese economy without blow back. Once you are in a MAD situation (either financial or military) then this limits your foreign policy options.
The financing that China and the Arab world provides the United States keeps interest rates low, but like all debt, it comes with strings attached, and right now the United States is not in a position to do anything that either China or Saudi Arabia considers to be a fundamental threat to its national interests.
fatbrick — you are right that politically driven investment isn’t exactly new. nor is it new for china to reward countries that don’t recognize taiwan. i think the news is that this flies against the often made assertion that sovereign funds (and central banks) don’t make non-commercial investments. This is a clear example of such an investment. and I cannot tell you how commonly PE guys looking to manage SWF money say there is no evidence of any politically driven investment …
everyone — please refrain from shouting (i.e. ALL CAPS). tis rude.
The financing that China and the Arab world provides the United States keeps interest rates low, but like all debt, it comes with strings attached, and right now the United States is not in a position to do anything that either China or Saudi Arabia considers to be a fundamental threat to its national interests
Why would the US want to do anything? The US can keep flooding them with dubious debt and they keep taking it.
Zbigniew Brzezinski has summarized US geo-political strategic for global hegemony in an article in Foreign Affairs. China and Russia have countered US geo-political strategy with the Shanghai Cooperative Organization (SCO) that incorporates Central Asian states into a economic-military alliance.
Zbigniew Brzezinski writes “Eurasia is the world’s axial supercontinent. A power that dominated Eurasia would exercise decisive influence over two of the world’s three most economically productive regions, Western Europe and East Asia. A glance at the map also suggests that a country dominant in Eurasia would almost automatically control the Middle East and Africa . . . What happens with the distribution of power on the Eurasian landmass will be of decisive importance to America’s global primacy and historical legacy.”
DC,
I am confused about your assertion that the LDC’s look to China to stand up to the IMF for them. Would this be the same IMF that victimizes China by forcing it to ignore IMF suggestions and adopt a dollar peg? What support is their for the notion that SAFE activities do anything for the LDC’s?
My political scientist brain may not all that great, but one would think that a tariff that mimic the old MultiFiber Agreement and help LDC exporters would be viewed fairly positively, especially when the alternative is a general Article XII measure that would hurt their exports as well as the PRC’s.
P.S.: the Brezeinski quotation does not support its proffered contention. It merely points out that changes in the balance of power in Eurasia have major consequences that need to be paid attention to. It does not support the proposition that the United States should attempt to takeover Eurasia. I would look at the original source if there was a citation but sadly there is none.
Hallo
What is the difference between
a. the CN-gov., which directs the way for their own SWF’s and
b. the Wall Street, which directs the way of the US-gov.?
There is no difference in the organised power: political power and econ.-power go hand in hand in both ways.
But the outcome seems to be different:
a. if the gov. has the upper hand, then the benefit of such actions is for a broad variety of interest;
b. if the Wall Street has the upper hand, than the benefit is just for few interests – and the rest has only the hope, that the trickle down will work.
And that is not only true for big countries, but also for the small ones.
globumedes
The thing I don’t like about flooding China with debt as a weapon is that in a little over 10 years we need to borrow to supplement social security, because congress spent the surplus already. My dreams of getting a ss check that I dearly paid for have been rapidly going away. If I can keep them from wiping me out with inflation, I’ll still be able to lead a simple existence, but I don’t think that will be the case for most people. And I always hate seeing those people sitting on blankets on the street corner selling trinkets whenever I go to Mexico.
This worries me far more than losing the Georgia War.:)
Beau Butts,
Many desperately poor African country go hat in hand to the IMF for loans to balance their budget and trade deficits. The US Treasury sponsored IMF structural adjustment programs for these nations further impoverish billions of poor people. I suggest that you read a book by John Perkins entitled “Confessions of an Economic Hit mam”. John Perkins, a former IMF economist says he was an “economic hit man” for 10 years, helping US intelligence agencies and multinationals cajole and blackmail foreign leaders into serving US foreign policy and awarding lucrative contracts to American business. “Economic hit men (EHMs) are highly paid professionals who cheat developing countries around the globe out of trillions of dollars,”
http://www.amazon.com/Confessions-Economic-Hit-John-Perkins/dp/1576753018/ref=tag_tdp_sv_edpp_i
The Chinese are relentlessly assailed by the US foreign policy elite for their geo-political economic independence. The real fear in the Washington Consensus over the Chinese is the inability of the IMF to force the Chinese to do anything.
Also read,
U.S. Geopolitical Strategy in Eurasia wars and conflicts
http://www.counterpunch.com/whitney09112008.html
bsetser,
Lets just say that it takes two to tango.
If the counterparty is willing to pay political price for Chinese money, it probably is just fine. If some parties, like EU and US do not like the political prices China asked when they are doing business, I guess that there is nothing China can do.
However, I think that China not only have received some political payments from western countris through spending some money, but also had paid political price to win some money.
And, the commercial arguments are clearly for voters’ consumption. I mean, we all know the government would paint some back room deals with some sound reasons.
Cedric Regula: I agree with your first post. In fact, I expect that result.
Beau Butts: The biggest problem I see with U.S. threats against China’s currency policies is not the threat of their massive reserve holdings - it is the U.S. companies that stand to lose, both those with production in China and those in the financial sector.
Twofish: You might be surprised by U.S. future trade actions. Your arguments remind me of those used to claim that the integrated world economy would not allow a major war, which were popular just before WWI.
don:
China greatly limits direct foreign ownership of production in China. They have some free zones where foreign companies may have 100% ownership, but the main way biz is done is foreign corporations just outsource to Chinese companies. You are also allowed to be a minority partner in a joint venture, with the Party maintaining 51% control, but that one is not very popular.
But I think it would actually be good if US corporations got priced back into Mexico by a strong yuan. Competing with China is causing Mexico lots of trouble with its NAFTA manufacturing base. That’s part of the reason for massive illegal immigration to the US.
But none of this stuff comes back to the US as long as we have $35/hr plus all bennies for union labor. That isn’t real world even in the US.
As far as the US financial sector, I guess the Chinese stock market, and US ETFs would go down if growth slowed. But that is still small. There is real estate and loan making, and a strengthening yuan should help returns in dollars.
Sometime I think 2fish is a Presidential Speech Writer in his day job.
Brad
given all the misgivings you have about foreign SWFs and the political power they have(potential or otherwise)- did SWF ever say that commercial investments were the only investments they would ever make? if they did, fair enough, they weren’t broad enough in definition or clearly didn’t think of the pr ahead of time. if however they said the main focus wasn’t political/non-commercial, that gives room for “some”non-commrecial investment. Since we’re in the midst of a race for the presidency, would it be fair to label an organisation, that did its business mainly in non political arenas, as political if it made legal permittable donations to a particular political party? In the same spirit, would we ever think Fox was pro-Democrat or CNN pro-Republican?
Money , particularly when it comes in huge amounts, is rarely apolitical. Whether the $ comes in the form of aid or “investment” (where the $ ultimately is traceable to official sources), there are always strings attached, if nothing else, Greenspan has got the “no free lunch” part right!The question is how much the profit motive weighs against other considerations.
How many organisations have no considerations other than commercial, should political considerations reinforce commercial profit all the better! Are there guarantees that we won’t find deals of similar nature in certain investment banks? Where your political deals increase the possibility of reaping the “mother of all” profits, is your commercial organisation on more solid “ethical/moral” ground?
I don’t believe for a second that SWFs don’t have considerations other than commercial, just like I don’t believe commercial organisations don’t have non-commercial motives. Perhaps, x-philes have it right, trust no one. Paranoia or just good sense?
At least Hank Paulson should please spare the Chinese his sermons on the merits of US Neo-liberal capitalism:
A Federal Reserve meeting is on this weekend to discuss an US taxpayer bailout of Lehman. Bernanke must consider Lehman also as “too big to fail” thus deserving an US taxpayer bailout. I have no doubt that the Federal Reserve and US Treasury will arrange an “under-the-table” bailout of Lehman at US taxpayer expense. That is the way it is always done. Privatize the profits to the Banksters and socialize the cost to the US taxpayer. After the Paulson bailout of the GSE’s, the political pressure will demand an US taxpayer bailout of Lehman. The terrible news surrounding Hurricane Ike provides an excellent cover for a Lehman taxpayer bailout.
Judy — SWFs have been pushing the argument that they are commercial players, who do not make politically driven investments. And the I-banks/ PE guys who want to manage Sov. fund money make this argument even more forcefully as they argue against subjecting SWFs to additional scrutiny.
I agree with your points that even commercial organizations act non-commercially. Murdoch wanted the journal for reasons that likely went beyond the expected return (an aside– cnn is down the middle, certainly not a liberal counterweight to fox). but the argument around sovereign funds has always included a large group who have argued that SWFs are commercial investors and shouldn’t be subject to additional scrutiny.
I also would fully accept the proposition that when the US government lends money to other governments it does so to promote its political and economic interests — the US government tho has traditionally been very explicit about it. think of the conditions attached to the us loan to mexico in 95.
Take a look at the “The Financialization of Foreign Policy” - from back in October 2007 in The National Interest. It said
“A message to those who think of finance as a mere footnote to foreign policy: Wake up. Today, these two worlds are intertwined as never before.”
http://www.nationalinterest.org/Article.aspx?id=15816
ha ha ha.
I looks like now, one year after the article was written, that “debt as weapon” has its shortcomings and could backfire.
Hope MAD still works with all the new players. Then at least we will be limited to regional conflicts and cold war style manipulations of “hostile” and “friendly” governments. Except that now it will be de-spooked with SWFs and CBs doing it.
I think we get lots of hand wringing from the Washington power elite, who may even admit among themselves now that “debt as a weapon” may not be the winning arsenal.