WCA March 2009

34 / 78

Wire & Cable ASIA – March/April 2009 32
The American economic crisis and China
To the chagrin of the US, a wary China
withdraws its attention to itself
If the United States thinks China’s $1.9 trillion in foreign
exchange reserves offers a way out of its own financial
troubles, the US would be wise to think again. On 3rd December
the chairman of China’s sovereign wealth fund announced
that China would not be making any further investments
in Western financial institutions for the time being. Nor,
said Lou Jiwei, the chairman and chief executive of China
Investment Corp, should the world look to his country for
salvation by economic means.
There is no mystery as to how Mr Lou came by his
jaundiced view of Western fiscal acumen. State-run
Chinese institutions have taken heavy losses on their
initial investments in, among others, the asset managers
Blackstone Group and Morgan Stanley, of the US, and
Barclays PLC, of Britain. Burnt once, China’s leaders are
rather more than twice-shy.
The Chinese are narrowing their focus, Mr Lou told fellow
panellists on the second day of the Clinton Global Initiative
conference, convened 1st December in Hong Kong. He said,
“Right now we do not have the courage to invest in financial
institutions because we do not know what problems they
may have.”
Mr Lou defended his position on the seldom-articulated
grounds of his country’s insignificance. Reporting from the
conference for the New York Times, Keith Bradsher traced
Mr Lou’s reasoning that, while China has more people than
any other country, economic output is still low: low enough
that the Chinese economy is not yet large enough to have
a big effect on the global economy. “China can only save
herself because the scale of China is still rather small,”
Mr Lou said. “If China can do a good job domestically, that
is the best thing it can do for the world.” (“China to Shun
West’s Finance Sector,” 4th December)
Accordingly, China Investment Corp, with $200 billion
on hand that had been expected to head westward, has
made its largest investments shoring up banks in China.
Speculation that the fund presided over by Mr Lou might
invest more money in Morgan Stanley evaporated when
CIC invested instead in Mitsubishi UFJ Financial Group, of
Japan. The world beyond the financial sector should also
not rely too heavily on the bracing effect of big spending
by China. The Times’ Mr Bradsher wrote, “While China has
already announced plans for a stimulus plan of $586 billion,
most of that money is earmarked for the construction of
highways and railroads, categories in which China’s need
for imports is fairly limited.”
Laura Tyson, of the US, who served as chairwoman ❖ ❖
of the Council of Economic Advisors under President
Clinton and who was on the panel with Mr Lou, said
that the current crisis would give further impetus to
Asia’s rise in economic importance vis-à-vis the West.
“It’s going to accelerate the move of economic power to
Asia,” Ms Tyson said. “It was under way before, but this
will accelerate it.”
Would the breakup of ‘Chimerica’ mean
the end of globalisation?
Even as China rejects the notion of itself as America’s
rescuer in the current economic crisis, there is another
designation that Beijing will find harder to shake off:
America’s banker. In September, China surpassed Japan
to become the largest foreign creditor of the US. In fact,
it is highly likely that, holding 10% of all US public debt,
the government of the People’s Republic of China is
Washington’s largest creditor – foreign or domestic.
Writing in PostGlobal, an experiment in collaborative
journalism hosted by the Washington Post, co-moderator
Fareed Zakaria observed that one of the more crucial
posts in the administration of President Barack Obama
will be that of US ambassador in Beijing. This official,
together with the host of others who will be managing
this relationship, will need to make sure that China sees
its interests as aligned with America’s. Or else, Mr Zakaria
warned, “Things could get very, very ugly.” (“China’s Lifeline
to the US,” 23rd November)
For a time, at least, China did see its interests as consonant
with those of the US. Citing “The Ascent of Money,” by
Niall Ferguson, Mr Zakaria notes the Harvard University
professor’s concept of a new nation – Chimerica – which
came to the birth after the cold war and now accounts
for a tenth of the world’s land surface, a quarter of its
population, and fully half of global economic growth over
the past eight years.
This was a harmonious marriage, with the Easterners getting
growth; the Westerners, low inflation and low interest rates.
The division of responsibilities was likewise in balance.
“The East Chimericans did the saving,” wrote Mr Ferguson.
“The West Chimericans did the spending.”
To ring the changes in the situation, Mr Zakaria called on
another professor (Columbia University), Joseph Stiglitz,
winner of the 2001 Nobel Prize in Economics, who noted
the popular notion that China and America are equally
dependent on each other.
“But that’s no longer true,” said Mr Stiglitz. “China has two
ways to keep its economy growing. One way is to finance
the American consumer. Another way is to finance its own
citizens, who are increasingly able to consume in large
enough quantities to stimulate economic growth in China.
They have options – we don’t. There isn’t really any other
country that could finance the American deficit.”
In effect, Mr Zakaria of PostGlobal wrote, the US is looking
to China to finance simultaneously the two largest fiscal
expansions in human history – “theirs and ours.”
Washington “desperately” needs Beijing to keep buying
American bonds so that the US government can run up a
deficit and launch its own fiscal stimulus. China will probably
try to accommodate the US because it is in the Chinese
interest to jump-start the American economy. But, he said,
“Naturally their priority is likely to be their own growth.”
Mr Ferguson, too, believes that China will try to keep ❖ ❖
American consumption going, but with the same caveat
Statue of Liberty Image from BigStockPhoto.com
Photographer: Marty