At a time of global uncertainty, any match for which is beyond living memory, there is only one thing of which anyone can be truly sure — that when the chaos is over and the dust has settled, the financial world is going to be a very different place from what it was just a few short weeks ago.
At the dawn of the new millennium, instant seers in Western media were predicting that during the first century, China would emerge as the dominant economic power. These pundits, especially in the United States, of course, hoped that this would not be true. But it seemed the smart thing to say and gave an impression of sagacity and commitment to harsh reality.
Few could have dreamt how quickly their projections would come true. Little noticed, as Wall Street crashed and burned, has been the support China has been giving to the US economy.
Chinese sovereign wealth funds, along with their counterparts in Arab Gulf states have not simply been busy helping recapitalize US banks and incidentally often seeing their investments nose dive — at least in the short-term.
Beijing has been busy buying US government debt. In the first half of this year the Chinese purchased some $225 billion of US Treasury bonds and paper from other US government agencies. These included paper issued by the failed US mortgage giants, Fannie Mae and Freddie Mac bonds on which one analyst estimates the Chinese have taken an astonishing $15 billion hit.
The Chinese are not surprisingly worried that they are being asked to foot the bill for US failures.
The People’s Bank, for instance, refused $200 billion to help fund the US bank bailout. Such reluctance stems in part from their limited experience of global capital markets. Indeed when the subprime bubble burst, the Beijing authorities were being advised by Wall Street investment bankers on how they could reform their own banking and financial system to bring it into line with the US model. Some of those Masters of the Universe found that suddenly they did not have banks to fly home to, let alone valid credit cards to settle their five-star Beijing hotel bills.
The Chinese understandably must now doubt the validity of the expensive advice on reform they were being given. But the reality is that with some $1.38 trillion of dollar-denominated foreign currency reserves, the Chinese cannot afford to let the US economy sink.
A communist government has to bail out the capitalist system. But their assistance, as that of other sovereign wealth funds, ought to carry a price.
That price should include the removal of invisible barriers US legislators have erected to stop what they regard as key assets, such as their ports, coming under “suspect” foreign ownership. We all know how Dubai World Ports was forced to sell off its portfolio of US ports after it had acquired P&O.
The global economy has to work both ways, not just in favor of US investors. Now is the time to make this clear.
