Wednesday, July 22, 2009

China Looks to Go on a Shopping Spree

In case you missed it, Chinese Premier Wen Jiabao announced yesterday that China is looking to spend its foreign exchange reserves. When Western politicians and economists called on China to bolster its consumption and demand, I don't think this is what they had in mind.

As part of its continued efforts to reduce exposure to the U.S. Dollar, China will use portions of its $2.132 trillion - yes, trillion - forex reserve chest to purchase tangible and corporate assets abroad. The announcement comes less than one week after China appointed Yi Gang as the new head of the State Administration of Foreign Exchange (SAFE).

Ostensibly energy and natural resources firms will be first on the acquisition list. Prepare for an uptick in xenophobia and anti-Chinese sentiment on Capitol Hill as China's state-owned companies take advantage of depressed asset prices to buy up U.S. companies and business units of multinationals with sensitive technologies.

One wonders which banks stand to gain from the underwriting and due diligence requirements coming in the months and years ahead, and whether outside consultants are advising SAFE on its investment strategy.

It will be interesting to see if/how this impacts Chinese demand for U.S. Treasuries. Without the Chinese government's continued purchases of U.S. debt, the costs of the Obama Administration's ambitious policy agenda will escalate further. On top of the declining support for his policies, an inability to acquire debt financing would leave his initiatives stillborn.



  2. That imperial privilege the United States has enjoyed since Bretton Woods – the dollar as global ‘reserve currency’ – will soon be memory: emblem of a closed chapter in world economic history. Why? One reason is that in the wake of the Asian financial crisis Asian states accumulated dollar reserves in order to secure external economic sovereignty, not through any calculation of risk and return. With a burgeoning US deficit and inflation, this makes less sense. Incentives change. The question is now: after the dollar, what?

    The first option is a move to the Euro (uninspiring); the second is a global economy without a reserve currency (unpredictable). What will decide between these is whether the oil producing states prove willing to denominate in multiple currencies (there is no a priori reason not to). For the OPEC states, the answer will rest on perceptions about the political significance of doing so.

    Is all this tantamount to a post-American political world? Like Britain over the 20th century, what will matter in a world of waning US monetary power is how Washington chooses to preside over its own decline. To succeed on the criteria by which historians will judge him, Obama must sustain a delicate form of democratic hypocrisy: concealing a focus on decline and adjustment beneath the mask of the same imperial rhetoric (U.S.A as no. 1) that his electorate is accustomed to. As different states project more power through the international economy, he must preserve America’s vital economic interests (ergo: belt-tightening, in the near-run) and disregard the rest. Has Obama made the private realization? Given the domestic pressures bearing on any executive and the fact that America’s foreign policy elite is still unready to accept the impending demotion, can he act on it? I say: scarcely.

  3. Was this post written by David Calleo? Sounds very familiar.

    As a student of Mr Calleo, I agree with much of this analysis. The key question to ask in regards to America's relative decline is, "exit to what?" The story of the dollar is a case in point about the inability, at this point, to construct a plausible post-American world. Thus, the world continues to hoard dollars, while discussing life after the dollar.

    When the financial crisis accelerated last September, markets flocked to the dollar. When the next geopolitical crisis hits, will the world look to America for security?

  4. Yet Capitol Hill wants the Yuan to be stronger -- what are they going to say when China has even more buying power and wants to invest in the United States? Can't have it both ways.

  5. Maybe the US can have it both ways. American consumers will be forced to buy fewer flat-screen TVs from China, while the Chinese can afford more American exports. A dollar devaluation that is absorbed primarily by the Asian currencies, in particular China's, would make a lot of sense. Americans are forced to consume less while the Chinese consume more. Sounds like a good start to fixing global imbalances



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