17 October 2008

The financial crisis: China's role - and responsibilities?

The superpower of the East (ouch - they really don't like the sound of that phrase in Washington!) is so big and so rich that it's just about everywhere nowadays. As the cash-strapped U.S. government's second-largest creditor after Japan, it would seem that China would or should have some cards to play in the completely unpredictable game and drama of the still-unfolding, banking-and-credit-crunch crisis that started in the U.S. and has spread and spread and spread around the world. Now, apparently, it may be ready to play some of them.

» Inter Press Service, in a report published in the Asia Times (Hong Kong), reports: "The Wall Street fire-sale has prompted economic pundits in China and elsewhere to call on Beijing to snap up stakes in United States financial institutions and further China's influence on global financial power." Chen Jie, an economics professor at Shanghai Fudan University, commented: "China cannot easily afford to pass up such an opportunity....We have been anxiously trying to find investment opportunities for our financial capital, but before the crisis, there existed a myriad of visible and invisible barriers for Chinese investment overseas, particularly in the United States."

However, so far, "China's response to expectations at home and abroad has been unassuming. Although fortified with great liquidity and large reserves, Chinese banks and government investors have preferred to sit on their hands rather than go on a shopping spree of tumbling Wall Street firms....Chinese bank officials have dismissed as groundless reports that China plans to buy up to $200 billion worth of U.S. Treasuries to help Washington combat the deepening financial crisis....Some of Beijing's conservatism stems from the fact that the global credit crisis has walloped the value of the Chinese government's initial batch of investments in U.S. financial institutions such as Morgan Stanley and Blackstone Group."

Nevertheless, none other than Carlos Slim Helú, the Mexican billionaire and the world's second or third richest person (depending on how the values of his own holdings have been seesawing lately), has suggested that "China should lead rescue efforts for the U.S. financial crisis." This week Slim noted: "China is now the most important country to help responsibly in this crisis....In the past, developed countries had reserves and financed developing countries, while today developed countries, especially the United States, are being financed with resources from developing countries."

» Reuters notes that although, reportedly, the head of the China Banking Regulatory Commission recently said that "China might consider injecting liquidity into the United States to help it save the market," a spokesman for that Chinese-government agency has indicated that its chief "never made such comments anywhere." Meanwhile, "[s]peculation is swirling that China, with U.S. bonds making up the lion's share of its $1.81 trillion in foreign-exchange reserves, the world's biggest stockpile, could have a role to play in any globally coordinated response to the global banking crisis" that began in the United States and has taken some of its hardest toll on Wall Street. Earlier this week, it was rumored that that the China "was planning to invest another $200 billion in U.S. Treasury bonds," however, China's central bank "said it had no information to that effect."

In China, a financial-news newspaper associated with People's Daily, a national newssheet, "on Tuesday quoted Liu Yuhui, an economist at the Chinese Academy of Social Sciences, as saying the Chinese government was on the horns of a dilemma." Liu was quoted as saying: "If China does not participate in the U.S. bailout plan, and that causes the financial crises to sweep over the real U.S. economy, then the damage to China will certainly be very great....China's bind is that, if the Chinese government actively participates in the U.S. bailout plan, that will mean the government assumes some of the bailout risk. If the bailout plan is aborted, China may be dragged in even deeper."

For now, China's foreign ministry has emphasized, "China's main contribution in the face of the current uncertainty is to ensure that it keeps growing quite fast." In other words, what's good for China has got to be good for the rest of the world - right? A spokesman for the foreign ministry said: "China feels strongly that faced with this kind of crisis, it will be difficult to solve it by relying on just one country's strength....We need the global community to join hands to deal with it together. This is China's clear position and commitment to the global community."

» Bloomberg notes that "Japan and China are the two largest foreign creditors of the U.S.: Japan holds $593 billion of U.S. Treasury bills, followed by China with $519 billion." The American financial-news service quotes the chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who remarked: "China owns us, lock, stock and barrel, so it's more important than ever that the U.S. monetary authorities coordinate their monetary policies with China."

In a news dispatch yesterday, Bloomberg added that Wednesday of this week might "go down as the day the economic balance of power shifted in Asia. In a move weighted with symbolism, China reduced its interest rate within minutes of cuts by the U.S. Federal Reserve and five other central banks, while Japan, the world's second-biggest economy, stayed on the sidelines." James Lilley, a former U.S. ambassador to China, said: "Japan is still a very big economic power, but China is the big enchilada on the field....They really, in their own way, are joining the world financial community in dealing with a very severe crisis."

Bloomberg noted: "China's move reflects how deeply the world's fourth-biggest economy has become integrated in the global financial system. While its gross domestic product expanded at 10.1 percent in the second quarter from a year earlier, its exports have been hit by a collapse in demand from the U.S. and Europe."

» Looking ahead and getting a head start in picking up some of the pieces from the fallout from the current crisis, an editorial in Japan's Asahi Shimbun notes: "Much like a tail wagging the dog, investment banks [in the U.S.] had engaged in practices that reaped huge profits using debt totaling several dozen times the capital held by the company. However, that system has now collapsed. The U.S. strategy of allowing its manufacturing base to dry up and turning to a financial plan specializing in finance and information technology has also reached a dead end."

As a result, Asahi Shimbun adds, as the current period of reckoning seems to be indicating, from now on Americans "will no longer be able to enjoy consumption patterns well in excess of their incomes that were made possible by an expanding credit line. 'Reaganomics,' or the neo-liberal economic policies that emerged since the 1980s, was based on two main pillars - tax cuts and deregulation. Those policies will likely face a critical review. It will become increasingly difficult for the United States to sustain its current account deficit - disparagingly referred to as a 'deficit without tears' - by simply printing more dollars. Problems with the dollar as the world's key currency will emerge in the future course of the current financial crisis."

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