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MSNBC.com
China controlling more of U.S. economy
Country leads surge of foreign investments in Wall Street banks
The Associated Press
updated 2:21 p.m. PT, Fri., Dec. 21, 2007
NEW YORK - There's a good reason schools across the country are scrambling to find people who can teach Chinese: It's quickly becoming business' second language as Wall Street seeks to tap China's $1.3 trillion in foreign reserves.

China has been making increasingly aggressive investments in some of the world's most prestigious financial companies in recent months — most of them American. Morgan Stanley, Bear Stearns, Blackstone Group, and Britain's Barclays have all negotiated major stakes by Chinese government-controlled investment funds.
Investment banks ailing from the subprime mortgage mess are looking for money to shore up their balance sheets. And China is leading a surge of strategic investments from Asia and the Middle East that so far have sunk about $25 billion into Wall Street banks.That's just the start of what some believe is a dramatic reversal of financial power in the shadow of Wall Street's credit turmoil.

"Both Chinese private and government interests are controlling more and more of the U.S. economy, and this is a result of the big trade and budget deficits we have," said Alan Donziger, professor of economics at Villanova School of Business. "These investments will make the U.S. somewhat less independent, but this is inevitable when we live in a global economy."To be sure, Wall Street's current predicament is "our own doing," he said. Turmoil in the credit markets have been fueled by defaults on subprime mortgages, and that's caused the Federal Reserve to attempt a bailout of the industry through interest rate cuts.

Lower interest rates have caused the dollar to slide in value against other major currencies. And, for foreign governments, the devalued dollar makes investments in these financial institutions cheap.

In the 1980s, Japanese investors snapped up real estate and invested in businesses across a number of sectors. This new wave of foreign investment is different because Asian and Middle Eastern governments are taking stakes in financial institutions — a cornerstone of the U.S. economy.

China agreed to pay $5 billion for a 9.9 percent stake in Morgan Stanley, and those securities pay 9 percent a year until they convert to shares in 2010. That translates to a gain of about $450 million of cash next year.But, for Morgan Stanley investors, the infusion of new stock two years from now will dilute their shares — and potentially make owning Morgan Stanley's securities less valuable. The same can be said about other banks that receive foreign investments.

The deals have been structured so that the sovereign funds are passive investors with no seat on the board, and this escapes regulatory scrutiny. This week President Bush said Thursday he was "fine" with foreign investors snapping up big stakes in U.S. banks and financial firms.

By keeping investments under 10 percent, it does not trip an automatic review by the government. Bush, and others, believe the injection of foreign capital helps keep the banks competitive and restores faith in an industry beaten down this year.

"These are non-controlling investments, provides capital, and really is a statement of confidence," said John Douglas, a partner with law firm Paul Hastings who heads its global bank regulatory practice. "There's a lot of good things here."

But, some banking analysts believe these government-sponsored funds might get more say than the banks are admitting.

"The Chinese are putting $5 billion into Morgan Stanley without there being some kind of quid pro quo of what they're going to get other than interest on their investment," said Dick Bove, an analyst with Punk Ziegler & Co. "It's part of a major shift in the worldwide financial system that I think will be very negative to the U.S."

He said these kind of investments are not over, and expects to see others surface next year. In some cases, investment banks that have already received investments might strike other deals to increase capital.
Next up? Speculation swept through Wall Street on Friday that Merrill Lynch & Co. is on the hunt for a foreign investment to help cushion what could be a huge fourth-quarter writedown in January.

"The whole situation has changed with financial power moving dramatically toward China and the Middle East, and that will have significant impact over time," Bove said.

© 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
© 2007 MSNBC.com

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MSNBC.com
China's economy not that mighty
U.S. holds steady as world's economic power with 23 percent GDP
The Associated Press
updated 4:57 p.m. PT, Tues., Dec. 18, 2007
SHANGHAI, China - The World Bank said the economies of China and India are about 40 percent smaller than earlier estimates after it revised calcuations using consumers' relative purchasing power to measure economic might.
The new figures released by the World Bank on Monday differ from conventional gross domestic product figures, which are calculated by simply converting local statistics into U.S. dollars — but don't take into account the wide variations in the purchasing power of a dollar from country to country.

A dollar converted into 7.4 yuan will generally buy more food in China, for example, than it would buy in the U.S.
The bank's latest revision under its purchasing power parity method, based on updated data, shows that India and China — two of Asia's fastest-growing economies — are about 40 percent smaller than originally thought.

"While PPP is not useful for commercial purposes, it is far and away the best measure of a country's standard of living," the Carnegie Endowment for International Peace commented on the report.

By the new figures, China is ranked the world's second-largest economy, with its gross domestic product accounting for 9.7 percent of the world total, behind the U.S., which accounts for 23 percent, it said. Earlier estimates based on older data said China's economy accounted for 14 percent of global GDP.
Japan was No. 3, Germany was ranked fourth, and India came in fifth, with more than 4 percent of total world output.

Together, those five countries account for half of world economic output, the Washington-based bank said.

"These results are more statistically reliable estimates," the World Bank said in a statement. "It was the most extensive and thorough effort ever to measure PPPs across countries."

Still, the report noted that PPP estimates, like all statistics, are subject to errors and should be treated as approximations.

Under the new estimates, the number of Chinese living on less than $1 a day — a widely used benchmark for poverty — is nearly 300 million, according to the Carnegie Endowment for Peace. The earlier estimates put that figure at 100 million.
However, World Bank President Robert Zoellick, in Beijing as he wrapped up a visit to China, cautioned that the new estimate also may be flawed in that the price benchmarks were collected from urban areas.

"One has to be extremely careful about trying to draw judgements about poverty based on these statistics," Zoellick told reporters in Beijing on Tuesday.
He said even more accurate measures would be based on the kinds of goods that China's poor majority would buy, which would be weighted toward food.
"We're working with the Chinese government to refine that work and as I think that will be out some time next year," he said.

© 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
© 2007 MSNBC.com

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China pushes for bigger role in reshaping the world economy

Chinese leaders have criticized the U.S. financial system and proposed a new international currency to replace the dollar. The nation sees the global downturn as a huge opportunity.

April 2, 2009
Reporting from Shanghai -- At a time when the U.S. and other traditional economic powers are weakening, China is flexing its muscles, signaling it will seek a much more assertive role in shaping the future of the world financial order.

The apparent shift in Beijing's approach is likely to be displayed at the Group of 20 nations' summit today in London, as China presses for changes in a global finance system long dominated by the U.S. and Western Europe.

Full article at:

http://www.latimes.com/business/la-fi-chin...,0,217135.story

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A revolution is not a dinner party. Thoughts about the future of China
Filed under: Geopolitical news — Tags: china, gordon chang, mao tse-tung, michael pettis, revolution — Fabius Maximus @ 12:01 am
This is a follow-up to Will China collapse? (5 August 2008).

Recent analysis:

“Get ready for lower Chinese growth“, Michael Pettis, op-ed in the Financial Times, 29 July 2009
”The spend is nigh“, Economist, 30 July 2009 — “The second article in our series on global rebalancing asks whether China can reduce its trade surplus by consuming more.”
“China’s economic policy: A ‘Great Wall’ or Capuan complacency?“, Arthur Kroeber, Financial Times, 11 August 2009 — See excerpt below.
Excerpt from The Coming Collapse of China, Gordon G. Chang — See excerpt below.
Quote of the decade about China

Secondly, a revolution is not a dinner party, or writing an essay, or painting a picture, or doing embroidery; it cannot be so refined, so leisurely and gentle, so temperate, kind, courteous, restrained and magnanimous. A revolution is an insurrection, an act of violence by which one class overthrows another.
— Mao tse-tung, “”Report on an Investigation of the Peasant Movement in Hunan”, March 1927

(3)  China’s spirit is not a Great Wall

“China’s economic policy: A ‘Great Wall’ or Capuan complacency?“, Arthur Kroeber, Financial Times, 11 August 2009 — Excerpt:

The Romans bounced back from calamity because they had a resilient set of alliances based on well-developed political and economic ties and a constitutional system that enabled a broad array of talent to come forward and express itself. No error lasted too long unchecked.

… China’s ability to maintain economic growth of around 8% despite the global shock took many by surprise. But this ability has nothing to do with systemic advantages, a distinct “China model” of growth, or skill in macroeconomic management.

… China’s present economic vitality results from a Great Wall all right – a Great Wall of borrowed cash. There is nothing remarkable or spiritual about an economy growing at 8 per cent when credit is allowed to expand by 34%.

The fact becomes even less remarkable when we recognise that nominal GDP (the appropriate comparator for nominal credit growth) grew just 3.8% in the first half. In other words, 10 dollars of new loans were required to generate just one dollar of economic growth.

In fact China’s first-half growth shows one thing and one thing only: the existence of a powerful state with the ability to commandeer its citizens’ wealth and plough it into more buildings, bridges and roads, with no regard for the return those investments will bring.
(4)  Excerpt from The Coming Collapse of China, Gordon G. Chang (2001)

There are plenty of Chinese this evening, but nothing is horrible and no one is sad. If anything, some are a bit too merry. The crowd, numbering in the hundreds, is boisterous as free-flowing liquor enlivens the revelers on the rooftop terrace of Shanghai’s historic Peace Hotel. The city around them is sparkling, floodlit in clashing colors against a pitch black sky, and the Huangpu River just below is bustling with commerce even at this late hour.

On the roof this perfect evening the wealthy and the famous mingle with Shanghainese on the make; pride, arrogance, and envy all on display. Personalities in black tie chat with gentlemen in long gray robes, and women in floor-length gowns mix with friends in tight-fitting qi pao split almost to the waist.

Guests have traveled across China and halfway around the world to be on display this evening in the radiant city that is Shanghai. But now the guests take their seats and the table chatter slowly dies. They look at the figure standing before them this Saturday evening in October 1999, just days after the fiftieth anniversary of the People’s Republic. The ornate ballroom at the top of the Peace Hotel is finally quiet.

The tall American woman is particularly striking; she’s in her finest revolutionary red. Her gown, covered in hundreds of Mao buttons of red and gold, is a fashion statement, however, not a political one, because she’s here to have fun. She takes a look around the room before starting. “The Revolution has become a dinner party,” says Maggie Farley, and the crowd cheers.

Yes, the revolution has become a dinner party. The People’s Republic today is not gentle, temperate, or kind, but it is not revolutionary either. The country and the party that leads it are now both old in their ways. The zeal that carried Mao from near defeat to total victory has been spent, lost in all the campaigns and programs that have gone wrong. Here, in the city where the Chinese Communist Party was born, there is nothing that is revolutionary. Nothing, that is, except the opponents of the current regime. They are weak today, but that will change.

The Chinese now want something different, as they did at the end of the Qing Dynasty and at the fall of the Kuomintang. The people are no longer poor and blank. They know what they want. The Chinese will take what they want one day, and that day will be soon.

The truth is that Party cadres will have only themselves to blame when that time comes. They have, over more than five decades, failed. Their republic is corrupt, repressive, and brutal. Its sheet of paper is no longer unblemished. China, for all its recent progress, is still poor. Chinese history has a pattern: governments like the current one fall.

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http://www.theglobeandmail.com/report-on-b...article1285968/

China-U.S. trade tensions mount
Beijing launches antidumping probes into imported U.S. auto, chicken products after U.S. slaps tariffs on tires

Gillian Wong

Beijing
The Associated Press
Sunday, Sep. 13, 2009

China is launching antidumping investigations into imported U.S. auto and chicken products, the government said Sunday, adding to a string of trade disputes with Washington including a recent decision to raise tariffs on Chinese-made tires.

The Commerce Ministry said it would look into complaints that American auto and chicken products are being dumped into the Chinese market or are benefiting from subsidies. The ministry said there are concerns the U.S. imports have “dealt a blow to domestic industries.”

The ministry statement did not elaborate on the complaints or how the investigation would proceed.

Washington and Beijing have recently traded accusations of protectionism, which they agree will hurt efforts to end the global economic crisis.

The U.S. and China, the world's largest and third-largest economies, have been engaged in a series of battles over access to each other's markets for goods such as tires, steel pipe, music and movies.

President Barack Obama on Friday approved new tariffs on all car and light truck tires coming into the U.S. from China, a move Beijing condemned as protectionist and a violation of global trade rules.

The Commerce Ministry's statement said China remained firmly opposed to protectionism.

“Since the financial crisis, China's actions have proven this point,” it said. “China is willing to work with countries around the world to act together to promote the quick recovery of the world economy.”

China and the U.S. banned each others' poultry in 2004 following an outbreak of bird flu in Asia. But China lifted the ban after a few months and has complained that Washington refused to do the same.

Since then, China has imported more than 4 million tons of U.S. poultry — mostly feet and other parts that are popular in China but not elsewhere.

The World Trade Organization launched an investigation of the U.S. ban on Chinese poultry at the end of July. Beijing told the WTO's dispute settlement body that Washington had imposed protectionist measures in completely banning Chinese chicken products entering the U.S. market. The United States said it was still examining whether Chinese poultry was safe for human consumption.

Last month, China said it revised its tariffs on imported auto parts after losing an appeal of a WTO ruling against its policy of requiring foreign automakers to buy more than 40 per cent of the components used in any China-made vehicle from local suppliers or pay more than double the usual tariff on imported parts.

Beijing's revision was such that all imported auto parts will be taxed at the same rate regardless of the percentage of foreign-made parts used to make a vehicle.

China argued the higher tariffs were needed to prevent auto makers from evading steep vehicle import duties by importing cars in large chunks. The U.S., the 27-nation EU and Canada contended that the tariffs encouraged car parts companies to shift production to China, costing Americans, Canadians and Europeans their jobs.

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On Friday, as President Obama crossed the Pacific to begin his first trip to Asia, the Census Bureau released its monthly trade tally. The headline was that the U.S. trade deficit grew to $36.5 billion in September, more than forecasters expected and the biggest such figure since January. But the really dramatic number was that 60.5% of the deficit, or $22.1 billion, was with just one country: China.


Obama arrived in Beijing Monday, but don't expect anything to get resolved. The U.S.-China economic relationship has become way too complicated and contradictory for simple solutions. (See pictures of Obama's trip to Asia.)


Within the U.S., the imbalance is mainly seen as the product of protectionist policies by China, in particular China's refusal to let its currency, the yuan, appreciate against the dollar. There's certainly something to this - it's now universally agreed just about everywhere but China that a freely floating yuan would be worth significantly more than the 15 cents it currently goes for. By keeping its currency's value artificially low, China makes its products cheaper in the U.S., thus encouraging imbalanced trade. (See a story about China's consumers and the world economy.)

But when China linked its currency to the dollar in the early 1990s, it was out not to create trade surpluses but to carve out a bit of stability in turbulent global currency markets. During the emerging-market currency crises of 1997 and 1998, China's success in keeping the yuan fixed at 8.3 yuan to the dollar was applauded in the West as a major contribution to averting financial chaos. Since 2005, China has been willing to allow the yuan to appreciate a bit (the current exchange rate is 6.8 yuan to the dollar). It just hasn't been willing to do this on any but its own extremely conservative terms.


In China, meanwhile, it is fashionable to blame U.S. trade deficits on the debt-addicted ways of American citizens and their government. There's an element of truth to this too. If the U.S. borrowed and spent less, its trade imbalances would be smaller. But China has been enabling this profligate behavior for years by buying trillions of dollars in U.S. government debt and mortgage securities as part of its continuing effort to - you got it - keep the yuan from appreciating too much against the dollar.


It's a bit reminiscent of the seemingly endless wrangles in the late 1980s and early 1990s with Japan, which accounted for the bulk of the U.S. trade deficit in those days. The trade deficit with Japan never shrank much in dollar terms, but it became smaller as a share of GDP starting in the mid-1990s, and was eclipsed by the trade imbalance with China in 2000 (in September the U.S. trade deficit with Japan was $4.1 billion, compared to $22.1 billion with China). The issue was never resolved, but it ceased to seem so important. Could that happen with China?


Probably not. There are two crucial differences. One is that much of today's U.S. trade deficit comes from U.S.-based corporations selling products at home that were partly or entirely made in China. As a result, the trade relationship with China has become far more ingrained in the economic fabric of the U.S. than that with Japan ever was. Some evidence: in the first nine months of 2009, the global economic slowdown cut the U.S. deficit with Japan 47% compared with the first nine months of 2008. The deficit with China dropped just 16%.


An even more important difference is that the stakes are higher with China. Japan seemed like a fearsome economic rival a quarter-century ago, but it wasn't really a political rival and, with a population less than half that of the U.S., it was unlikely ever to surpass the U.S. as an economic power. China, with its billion-plus population, seems destined to surpass the U.S. in economic clout, and it appears to have designs on rivaling the U.S. as a political and military power. Which means there's no easy way out of the U.S.-China trade impasse.