The new financial superpowers (part 1)
In James Clavell’s Noble House, there is a scene where a fictional Scottish trading house operating in colonial Hong Kong ends either a run on its bank or a run on its stock (or maybe both – I forget) by obtaining an emergency loan from China’s communist government. The loan didn’t come directly from China’s government – it came though the Hong Kong branch of Bank of China – but it clearly required Beijing’s approval.
Clavell’s novel was set in a time when China’s government was still really communist. 1949 wasn’t a distant memory in the 1960s.
The world has changed since then. Chinese Communist have turned into capitalists. And fiction has turned into fact.
Last week, a capitalist icon turned to government – and not its home government — for help in a time of stress. About two weeks ago Citi’s top executives boarded a private plane to fly half-way around the world to cement the sale of a decent chunk of Citi’s equity to the Abu Dhabi Investment Authority (ADIA).
Depending on your point of view, Citi’s recapitalization is structured so that ADIA either gets a generous coupon before it is obligated to buy Citi’s stock, or the generous coupon is a way of disguising the discounted future sale price of Citi’s stock. See ALEA for the real details (hat tip Naked Capitalism).
ADIA’s investment is structured to stay below the 5% threshold that requires Fed approval (for a bank), let alone the 10% threshold that requires CFIUS (Committee on Foreign Investment in the United States) review. Still, it is hard to believe that Citi’s new CEO won’t pay a visit to ADIA along with Prince Alaweed soon after being selected. He (or she) might even get flown over in a private A380 rather than Citi’s corporate jet …
Citi got into trouble, at least in part, from off-balance sheet activities that were not exactly transparently disclosed. So perhaps it is fitting that it turned to one of the world’s least transparent investment funds – one owned by a rather untransparent government – for help.
It wasn’t all that long ago that Wall Street – Citi bankers included — were scouring the emerging world for state-owned companies that could be sold to private investors in the US and Europe. Now the world’s investment bankers seem to be scouring the US and Europe for private assets that can be sold to government investment funds and state-owned companies in the emerging world.
Privatization is out. Selling private companies – or big chunks of a private company — to another country’s government (partial renationalization?) is in.
Back when there was money to be made selling state-owned firms in the emerging world to private investors in the US and Europe, investment bankers argued that one major threat to global prosperity was political opposition to privatization. Any country that bowed to domestic political pressure and didn’t sell off its telecoms, banks and utilities risked being left behind. Now that there is money to be made selling private firms to state investors, investment bankers argue that one of the biggest threat to global prosperity – or at least “market liquidity” – is political opposition in the US and Europe to selling stakes in US and European private companies to emerging market governments.
The financial world’s uber-capitalists have been brought to heel by the world’s new financial superpowers.
Or perhaps the state in the emerging world itself became uber-capitalist?
Abu Dhabi Inc (10% of the world’s oil reserves split — unequally — among less than 500,000 people) has very attractive profit margins so long as oil can be sold at close to $90 a barrel. The leaders running some emerging market governments may now have more in common with top bankers on Wall Street and in the City than the democratically elected leaders now running the governments of the world’s advanced economies …
No Responses to “The new financial superpowers (part 1)”
American hegemony. Indeed.
Oh please Brad, overseas FDI into China far exceeds Chinese FDI into foreign assets. It speaks of xenophobic paranoia that Chinese investment in the US Economy is always scrutinized for its potential National Security threat. Was the CNOOC’s bid for California’s Unocal really a National Security threat considering that Unocal’s primary energy production assets were in Southeast Asia including Thailand, Indonesia, and Burma? Unocal produced very little domestic US production that could easily have been divested after the merger.
Since it joined the World Trade Organisation in 2001, China has been attracting foreign direct investment (FDI) at the rate of more than $1 billion a week. High value-added and high-technology products for export from China are largely driven by FDI into the Chinese economy. For instance, the Intel Corporation’s $2.5 billion semiconductor fab in Dalian will produce motherboard chipsets for computers around the world.
I would like to see more US companies owned, at least in large part, by foreign “haves” such as China, and the Gulf emirates, etc., etc. They would probably see that the companies were far better run than they are now; they would be able to take the long view and not worry about the weekly fluctuations in the stock price, etc., etc. And the fact that some of the profits would go abroad might teach Americans about the costs of the profligacy.
I’ve read this blog for about a month or two now. I greatly enjoy Brad’s thoughts and a few consistent commentators (twofish/Dave Chiang/MM/etc). But the prior guest’s comments about companies being better run by China and Gulf emirates just irks me to the point where I have to post for the first time.
Where in your non-fact-based world do you find that China and Gulf-based companies are more efficiently run and have better productivity/returns on capital than in the US? Just because US consumers spend like drunken sailors (and these foreign entities seem to subsidize the spending w/ little restraint, no less), how does that translate to ‘profligacy’ in our corporate sector? Your comment is baseless, mindless, and idiotic.
12-06 09:31:18 sounds like something DC might say…
Booming Chinese trade and economic ties with the Middle East
City officials say vendors represented in Yiwu’s wholesale complex shipped the equivalent of 500,000 containers of merchandise to overseas markets last year. But only about 80,000 of those containers went to the United States, while about 165,000 went to the Middle East. Nearly all the merchants I spoke with – even the umbrella makers — cited the Middle East as now their top export market.
Yiwu has a thriving Muslim community, with thousands of residents from countries like Pakistan, Afghanistan, Iraq and Iran. In the evenings, the call to prayer wafts from a downtown mosque over “Exotic Street,” where women in long white headscarves serve kabobs at Abdullah’s or the Baghdad Restaurant.
Merchants told me they rely heavily on Middle East middle men for tips on product design and the tastes of consumers in faraway lands. (In my brief visit, I wasn’t able to able to sort out the origins of Yiwu’s Middle Eastern connection, but this article in the China Economic Review suggests some interesting leads.)
Yiwu’s small commodities complex keeps getting bigger. Developers have begun construction on a new phase of the facility that will add another 29 million square feet, more than doubling its current size.
12-06 09:31:18 sounds like something DC might say…
For the record, I didn’t write it. – Dave C.
Welcome to a blog that offers interesting & valid opinions.
The key word in the comment by guest about “foreign haves” ability to run u.s. companies better is—PROBABLY—…
I suggest that you read a comment twice before responding & then make a relatively adult attempt at civil discourse if you hope to be taken seriously.
Using comments like baseless, mindless, and idiotic is like shootin’ from the hip & that subjects you to a possible ricochet.
Guest on 2007-12-06 10:23:08
12-06 09:31:18 sounds like something DC might say…
WRONG—Dave Chiang is one of the most valuable contributors to several financial blogs & he offers links where appropriate , furthermore he has been reading this blog for longer than “about a month or two now”.;-)
I think it’s a bad idea for governments to buy equities. Governments should provide the framework and infrastructure for businesses to thrive and not have a stake in the businesses themselves. It makes it too easy to have a conflict of interests. It may cause the governement to favor certain players over others. it won’t be survival of the fittest, rather survival of the ones with the most shares owned by the government. In the end, it will likely lead to massive corruption.
I’m not that worried about China buying US equities. China probably favors building their own businesses that compete with US businesses rather than buying ours. If they buy ours, they have to work with a foreign culture, be held hostage to US laws, and create jobs in the US rather than China. So far, they’ve shown they can create their own businesses and they’ll probably be successful expanding into other business areas.
The oil exporters haven’t really shown much of an ability to build business from the ground up that can compete with western and asian companies so I can understand their interest in buying US equities. Allthough, their plans will eventually lead to collapse after the oil runs out. You can’t make a living as a hands off business owner forever. Eventually, all businesses go bankrupt.
I take issue with a few items. Firstly, your sense of context/diction is erroneous. If you hang your hat on words like ‘maybe’, ‘probably’, or ‘possibly’, then I can only presume you are either a lawyer or someone who simply chooses to ignore 90%+ of what someone writes when a certain adverb pops up into a paragraph.
Secondly, I very clearly took issue with the comment that American businesses were run with ‘profligacy’. The term means ‘recklessly extravagant and wasteful’. I find that opinion to be ridiculous. America’s worker productivity and lengthy history of higher returns on capital relative to many other countries is well documented.
Analysis from multiple sources regarding cash returns on capital invested in American companies during recent history clearly shows US consistently outperforming world averages by more than 100 bps in almost any given year, even in the depths of the ’01/’02 recession. US worker productivity has also been reasonably consistent and more impressive than all other G7 countries.
The GCC met this past week and all their states are running unemployment rates north of 10%+. Saudi Arabia’s non-oil related manufacturing employment constitutes barley more than 5% of their total labor workforce. Where is this bastion of highly productive, well run companies in the Middle East? Did SABIC buy GE Plastics to export their technology/productivity/know-how to GE’s asset base? It was very clearly the other way around.
Finally, where is YOUR factual analysis that US companies are so poorly mismanaged that they need Sheiks from the Middle East to straighten out their operations and waste eliminated?
I guess you just arbitrarily take some high profile, industry like Auto manufacturing — saddled with historical costs and in the midst of a major industry restructuring to better reorient themselves for competition — then call that the basis for an entire country’s inability to run companies without extreme waste? Give me a break.
“…Indian companies are well positioned to navigate the credit crunch and maintain their global buying spree…” http://www.reuters.com/article/innovationNews/idUSHKG15457020071206?dlbk
No cooperation on Taiwan, No US Warship visits to Hong Hong. Forget about any Chinese concessions to Paulson
China’s Yuan Falls Most Since End of Peg Before Paulson Visit
Dec. 6 (Bloomberg) — The yuan fell the most since China ended a fixed exchange rate in 2005, damping speculation gains would accelerate before a visit by U.S. Treasury Secretary Henry Paulson next week.
The yuan tracked declines in the yen and the euro, components of the basket against which the currency is managed. Paulson yesterday said the yuan’s 11.7 percent advance since the end of the peg in July, 2005, still isn’t “fast enough” to address global trade imbalances.
“The Chinese won’t be doing anything on the back of Paulson’s visit,” said Sue Trinh, a currency strategist in Sydney at RBC Capital Markets, the second-most accurate forecaster in Bloomberg News surveys.
“…Fascist governments nationalized some key industries, managed their currencies and made some massive state investments. They also introduced price controls, wage controls and other types of economic planning measures. Fascist governments instituted state-regulated allocation of resources, especially in the financial and raw materials sectors…” http://en.wikipedia.org/wiki/Fascism
“Legislators in Japan’s governing Liberal Democratic party are promoting the creation of a $100 billion sovereign-wealth fund… [that] would be “run by professionals from all over the world.” http://online.wsj.com/article/SB119692638081915635.html?mod=googlenews_wsj
This is to the guest who said that he would like to see more American companies run by Chinese management. Sure, and you’d probably like to see hundreds of thousands of tons of factory pollution dumped into our rivers, millions of babies born with birth defects because of the pollution, and American employees working for $0.20 an hour. Yep! You’re a loyal Bush/Cheney free-market republican. When the above happens to you, you’ll be crying a different tune.
GM Will Invest $5 Billion in China as Demand Grows
Dec. 6 (Bloomberg) — General Motors Corp., the world’s largest automaker, plans to invest as much as $5 billion in China over the next five years to expand its share of the world’s fastest-growing major car market.
The Detroit-based company will spend about $1 billion a year on car and engine development, production facilities, technical and after-sales support and infrastructure, said Kevin Wale, president of GM’s China unit, in an interview in Shanghai yesterday.
The US Economy is in terrible shape! Our government has been psychologically manipulating the American people every time they publish blatantly false data on employment and income that makes our economy look stronger than it really is. If the average American realized how bad things were, they might try to save more. But spending would collapse if they did, so the goal of the Bush Administration seems to be to hide any signs of a recession as long as possible.
The big reason the economy is going over the cliff is not the direct result of the sub-prime mortgage debacle and the hundreds of billions in investor dollars that have been lost, although this is a major contributing factor. The reason, we focus on, is that the economy is already in recession as a direct result of homeowners having had that ATM ripped out of their house.
Even so, Beijing appears to be growing tired of listening to a lengthening litany of American complaints. When the U.S. ambassador held an annual seminar in October on protecting copyrights, trademarks and other intellectual property, few Chinese officials showed up, unlike in years past.
Adding to the tense atmosphere are recent political spats between the two governments over Congress’ presentation of an award to the Dalai Lama, planned U.S. arms sales to Taiwan and China’s refusal to let the USS Kitty Hawk and other ships make traditional port calls in Hong Kong.
The dialogue faces losing further momentum with the expected retirement early next year of Vice Premier Wu, the government’s most effective troubleshooter. Another stalwart of the talks, Commerce Minister Bo Xilai, is also leaving, having been transferred to the provinces.
In the end, it’s a fair way of rebalancing the world economy towards a real global world economy and power, in a charitable way and without military interventions, and as they have a long way to run until they get any real power, profits start to rebalance a bit.
They don’t set policy rules to USA.
The renationalization of USA policy and democracy would be a better way, but if you want free markets, here it goes!
States playing cards, instead of corporations.
Any change for you6pack?
Investment banks will run to what ever makes them money, and people need to remember that. Privatization was the big thing ten years ago because banks stood to make money from it. Today, the IB’s are salivating over sovereign wealth funds, because that is where the fees are going to be.
The system works well as long as you have customers that realize that are listening to someone trying to sell them something, and are wiling and able to do their independent research. It can break down very badly when that is not the case, which is the case with widows, orphans, and third world nations.
One funny joke….
The investment banker is speaking to the devil from hell. The devil says “I give you all the money and prestige. I just want one thing in return: your soul.” The investment banker thinks for a few minutes and says “what’s the catch?”
“…Even Chinese scientists fear what they are eating…” http://www.nytimes.com/2007/12/06/world/asia/06cnd-food.html?ref=world
“…meat and egg prices in China have gone up by almost 50%… “every bubble starts with a change in the real economy.”…” http://www.economist.com/displaystory.cfm?story_id=10250420
“…As many as 286,000 illegal immigrants, or 7 percent of U.A.E. residents, left the country under an amnesty that expired Nov. 3, according to the Labor Ministry. The U.A.E., whose biggest member is Abu Dhabi, had 700,000 migrant construction workers last year, many from India. “It will have the potential to delay projects,” says Chris O’Donnell, chief executive officer of state-owned Nakheel PJSC, which has $60 billion of projects under way… Last month, about 4,000 workers were arrested after four days of strikes during which 14 buses were smashed…” http://www.bloomberg.com/apps/news?pid=20601100&sid=aiuKIZaGs1yQ&refer=germany
and how has Citi, and the rest of its shareholders, profited from Prince Alaweed’s guidance so far?
Are financial whores exchanging bosses, for charity?
You know that after a crisis, you die or you survive stronger.
Just try it!
The fictional Scottish trading company in Noble House was actually a real one, Jardine Matheson. Jardine Matheson played a major role in the founding of Hong Kong… And the Opium Wars…
And to square the circle, the Swire family (of Jardine Matheson) helped endow “my” Oxford college –
do you know if Jardine Matheson ever got “bailed out” by the Bank of China back in the day?
Brad, this is probably more a response to your previous blog, but I just came from a lunch with a senior banker, an automotive company CEO, and a PKU professor (sounds like “three men walked into a bar…”), and one of the main topics was Rio Tinto/BHP (very bad news for China, it was agreed) and more generally China acquisitions abroad. They claimed that although there were many good official reasons for Chinese firms pushing abroad, many CEOs were not likely to be excited about the prospects. The CNOOC deal was hugely embarrassing because the structure of their bid came in late and violated the “rules of the game”, and so CNOOC found themselves in a nasty fight that quickly became political. The Lenovo acquisition of IBM PC has been widely promoted at home as a success but the professor claims that most of the profits have come from reassigning domestic profits and Lenovo is even dropping the IBM name because it has lost so much market share. They mentioned several other unsuccessful deals.
Basically the concern – not a big surprise in my opinion – is that Chinese managers simply do not have the experience to acquire and manage companies abroad, and the best path forward is to make small acquisitions and learn the business.
That doesn’t mean that large foreign acquisitions won’t happen. The government is getting desperate about monetary expansion and there is absolutely no lack of foolish managers, many of whom are simply state-assigned bureaucrats, who wouldn’t hesitate to lead the charge, especially if it seemed to mean a significant step up in power and visibility. But it does suggest that even in China there are expectations among the soberer crowd of many serious missteps.
By the way I asked the CEO what would happen to his company if there were a 20% RMB hike. He said he would love it. About 20% of his production was for export and he said that while it might raise costs, the increase would not be significant because of the high import component, and his prices were still low enough to be competitive globally. The real significance for him would be that his domestic sales would become much more profitable because of the reduction in import costs.
“Oh please Brad, overseas FDI into China far exceeds Chinese FDI into foreign assets.”
Dave you miss the point, FDI into China is not by the U.S. government. If you’d like to say that Intel is just an extension of the U.S. government I don’t think it would fly. The U.S. banking system, on the other hand, is an extension of the U.S. government.
I think that when the Guest who wrote about US companies being run or their running being influenced by part owners from the Gulf spoke of “profligacy” he meant that of US consumers. The term did not apply to the companies. It is US consumers addiction to consumption (profligacy) that has created a situation in which a part of US assets is liable to be sold off to pay for the consumption.
“Finally, where is YOUR factual analysis that US companies are so poorly mismanaged that they need Sheiks from the Middle East to straighten out their operations and waste eliminated? ”
I think you mean “poorly managed” not “mismanaged.” One might think of Citigroup, Bear Stearns, Morgan Stanley, etc., etc., plus many mortgage brokers, etc., as companies that have been mismanaged. Or do you think their desperate straits are the result of good management? Or take FNMA and Freddie Mac. Well managed?
re: Citigroup, Bear Sterans, Morgan Stanley.
1. You are picking on an industry which is temporarily down and out, but has a lengthy track record of exceptional returns and good performance. I don’t see any Middle Eastern banks or even Chinese banks who’ve come to the US and blazed a trail down Wall St.
2. I disagree they are mismanaged businesses. If anything they are poorly regulated and I would blame the federal reserve and treasury dept. for failing to realize that what used to be yesterday’s money center banks are now global hedge funds trading all kinds of crap instruments backed with implicit put options to US taxpayers (ie. guaranteed bailouts).
It’s hard for me to speak specifically about Fannie Mae and Freddie, because I’ve not done the detailed analysis. I do work at hedge fund as a generalist, but tend to shy away from financials due to their opaqueness.
I’ve done a little work on them and I think what’s really happened is that the banking industry has a sliver of shareholder equity (a small capital base) and is levered up like crazy trying to generate returns because the regulators have let them. But this is a whole different line of discussion.
I don’t see how you can crap all over this industry for packaging up and distributing paper that buyers desperately wanted. People can bitch about how Merrill Lynch and Henry Blodget screwed them in the .com bubble or how Goldman sold bad mortgage paper, but where was their own detailed investment analysis when these IPOs/structured deals were being shopped? We are not 2 year olds out here in the investment community. It’s not Goldman or Merrill’s job to hand hold anyone. Wall Street will package up and sell you a box of rhino crap, if there is a market for it.
I also see how you neglected to mention Jamie Dimon/JPMorgan’s ability to navigate this financial mess as well as a few other firms. He must be secretly a Muslim or have distant Chinese relatives.
Stop talking about headline grabbing temporary ‘scandals’, you ninnies. Get back to the real world: Proctor & Gamble, Coca-Cola, Wal-Mart, Bechtel, Intel, Microsoft, UPS, etc.
I am not sure what you are getting at here: “That doesn’t mean that large foreign acquisitions won’t happen. The government is getting desperate about monetary expansion and”…
I presume you mean Chinese domestic “monetary expansion”?
(1) But this happens as a result of intervention, regardless of what China spends the dollars on?
(2) Chinese domestic monetary expansion is not that fast, considering the growth rate of its economy is it? I thought that base money is only growing slightly faster than real GDP, and broad money slightly faster than nominal GDP. That is similar to many other countries.
A little more detail might help to clarify the point please.
“China’s domestic stockmarket bubble has sprung a leak. The Shanghai Composite index is down 20% from its peak… And profit growth isn’t all it’s cracked up to be anyway. “Companies big and small are playing the markets with abandon,”… Morgan Stanley reckons that about a third of reported earnings stem from non-core investments, which, in almost all cases, means equities. Another estimate says that as of 30 June this year, 494 listed firms had stock holdings worth $45.6bn, compared with $2.3bn held by 163 companies a year earlier. The danger is that a sliding market depresses investment profits, damaging companies’ earnings and hurting their stock prices, pushing the market down quickly. This “snowball rolling downhill” scenario… What’s more, as Balfour says, given that firms have been bolstering their bottom lines by playing the markets, the conventional wisdom that corporate China – and hence the real economy – will barely be affected by a sliding stockmarket “is looking suspect”.” http://www.moneyweek.com/file/39120/air-starts-to-hiss-out-of-chinas-market-bubble.html
“The financial world’s uber-capitalists have been [brought to a heel??] by [the world’s new financial superpowers??].”
sorry, but this is a phenomenally stupid thing to say.
“I disagree they are mismanaged businesses. If anything they are poorly regulated…”
Hardy har har. The regulators have gone and done it! Maybe the regulators should be paid the bonuses too?
“…he would be even more bearish now on European financials “where the downturn is going to hit later than in the US, and where the lack of transparency in terms of the problems in the credit markets remains much greater than in America”…” http://ftalphaville.ft.com/blog/2007/12/07/9468/greed-fear-and-you-think-america-has-problems/
Last week, Chinese Prime Minister Wen Jiabao already has told a visiting European delegation that China will not consider a major “revaluation” of the yuan currency. In Wen Jiabao own words, “China will only gradually revalue the yuan in accordance to domestic economic considerations”. I suggest Hank Paulson stop wasting US taxpayer dollars flying to Beijing, cajoling the Chinese to make concessions for his narrow special economic interest lobby group on Wall Street.
The economic interests of the 300 million low-skilled migrant workers in labor intensive industries should not be sacrificed. For all of the commentary by Brad Setser and other Western pundits about Chinese stealing US jobs, how many Americans are really interested in working in sweatshop conditions for the textile, toy, shoe industries. In labor-intensive industries, the salary differential between a US and Chinese worker is almost 50-1. No amount of revaluation will result in the return of those industries to the United States.
RebEcon, yes I meant Chinese monetary expansion, not global, although there is a good case to make that the latter is at least a partial cause of the former.
You are right that domestic monetary expansion arises largely (exclusively) because of PBoC intervention, but if Chinese companies make foreign acquisitions and fund them locally (out of retained earnings, local borrowings, share offerings etc.), they would create a domestic source of demand for dollars which would reduce the amount by which the PBoC would need to intervene to keep the RMB at the desired level. This would reduce pressure on the PBoC and on domestic money supply expansion.
As for how fast money is growing, there is a debate here about the usefulness of different monetary aggregates as proxies for underlying money growth (for example, PBoC liabilities to banks and the bond markets, one proxy for liquidity, has nearly quintupled in the past four years, while the economy has grown by less than 50%). Basically the strongest argument that China is experiencing excessive growth is probably that China seems to be suffering all the expected consequences of that growth – low real interest rates, high and rising FAI, speculative excesses in the stock and real estate markets, constant overshooting of credit growth targets, rising inflation, etc.
In fact this week’s leadership meeting in Beijing came to the conclusion that China needed to shift monetary policy from “prudent” to “tight” (whatever that means – in China it is hard to argue that recent monetary policy has been prudent), and is largely interpreted here to mean that the PBoC’s anxiety over money growth over the last two or three years has finally spread to some of the State Council members. They also announced that this time caps on loan growth (which have been in place for three years but always ignored) are going to be real.
Many of us expect that the latest measures will fail too, and they will finally do the thing they have been afraid to do — force faster RMB appreciation. In my opinion, however, they have waited way too long and it will be hard for them to get out of this without pain. Unfortunately unemployment still seems to be rising in the cities and unhappiness with the government also seems to be rising. That makes an adjustment especially tricky — all the more so with the Olympics coming in August.
Thanks for clarification Michael; interesting information.
DC: In Wen Jiabao own words, “China will only gradually revalue the yuan in accordance to domestic economic considerations”.
That statement means nothing since Wen defines what “gradual” and “major” means, and he can change his mind tomorrow.
DC: I suggest Hank Paulson stop wasting US taxpayer dollars flying to Beijing, cajoling the Chinese to make concessions for his narrow special economic interest lobby group on Wall Street.
First of all, part of the job of Treasury Secretary is to represent the interests of Wall Street. Second, it’s useful to hear what people what you to do, just so you know. The primary job of the Beijing is to look after Chinese domestic interests, but knowing what Wall Street thinks China should do is useful. Finally, Treasury has gotten about 80% of what it wants from China. The three things on Paulson’s agenda are 1) capital account liberalization 2) increased access to Chinese financial markets and 3) internal liberalization of Chinese financial markets. They’ve gotten 2) and 3).
Paulson doesn’t care directly about the value of the RMB since his job isn’t to care about US employment outside of financial services. Congressmen take care of that. He does care removing currency controls so that lots of Chinese money ends up on Wall Street, and appreciating the RMB is only one way of doing that. The QDII program is another.
Manufacturing jobs are not coming back to the US, but part of the plan is to replace those manufacturing jobs with jobs in financial services. The more Chinese money gets processed by Wall Street, the more jobs there are in NYC.
Pettis: Unfortunately unemployment still seems to be rising in the cities and unhappiness with the government also seems to be rising.
The most useful part of Communist Party strategy documents is that they are an authoritative set of instructions about what to care about and what not to care about. The last set, put macroeconomic stability high on the list, it also put rural development high, and it kept talking about deepening reform. Urban employment was not mentioned.
prophet: It’s not Goldman or Merrill’s job to hand hold anyone. Wall Street will package up and sell you a box of rhino crap, if there is a market for it.
Wall Street’s role in the economic is precisely to package up and sell rhino crap and create a market for it. As long as there is someone on the other side that has equal expertise, things work well. In the case of China, Wall Street can use all the tricks and games to make money, because there are people on the other side with the expertise to make their own decisions. This isn’t the case with Zambia, and then you do run into big problems.
In the case of the United States, there is a blanket rule that says that Wall Street just can’t sell you most of its products unless you have a lot of money, and that blanket rule gets rid of most abuses. One of the loopholes is pension funds. The assumption is that pension funds can be exempt because the people in charge of them would hire people who can negotiate with the sellers as equals. Where that assumption breaks (Florida) there have been big problems. Looking at the biography of the people involved in that fund, I was pretty shocked since it seemed that they were way in over their heads. Looking at the salaries they were making, it made sense why that happened.
One bias in the system is that people with lots of financial expertise tend to end up in investment banks and hedge funds, because that is where the money is. The way the system deals with this is that some of the major regulators (the Federal Reserve Bank of New York and the NYSE) are semi-private and can afford to pay competitive salaries, and to have senior people like Paulson and Rubin who are essentially doing charity work.
2fish — I disagree with your definition of the job of the Treasury secretary. It isn’t to look after the interest of the financial sector. It is too look after the interest of the US economy. And my main critique of Paulson’s China policy is that it has focused too heavily on the interest of the financial sector. His commitment to letting the RMB move always seemed more for public consumption than something he really wanted (now tho he needs to deliver).
A lot of the financial liberalization reforms that PAulson has pushed will produce jobs working for US owned firms in China rather than jobs in NYC — basically, they help US capital far more than even high-end labor. At least that is my view.
and perhaps more importantly, so long as China relies on the financial sector to subsidize the cost of sterilization/ the cost of reserve accumulation, it seems to me like there are real limits on financial liberalization.
Certainly the kind of capital account liberalization we have seen (tighten all kinds of inflow controls while encouraging state firms and state banks to hold fx/ subsidizing their external investors by putting the XR risk on the state’s balance sheet — via swaps and the like) strikes me as very far from what US policy makers should want.
bsetser: I disagree with your definition of the job of the Treasury secretary. It isn’t to look after the interest of the financial sector. It is too look after the interest of the US economy.
The US economy is far too complex to have one person looking after it, and there are too many different and conflicting groups for one person. The way that it works in the Washington is that Treasury has represented financial interests, Commerce manufacturing interests, Labor labor interests, Agriculture agricultural interests, and each Congressman represents their district. Put them all into a cauldron and something sensible comes out.
The Secretary of the Treasury is a vastly different position than Finance Ministers in most Latin American nations, which serve something of defacto prime minister. There are some institutional reasons for this, most important of which is the the Secretary of Treasury has no control over either monetary or finance policy. Curiously, the role of “Finance Minister” in China is also relatively weak, for many of the same reasons.
bsetser: A lot of the financial liberalization reforms that PAulson has pushed will produce jobs working for US owned firms in China rather than jobs in NYC — basically, they help US capital far more than even high-end labor. At least that is my view.
That I don’t think is true. All of the really high level expertise in finance is either in New York City or London, and financial expertise is something that doesn’t export well.
The benefit for the PRC, is that Beijing really seriously wants Hong Kong to displace Tokyo as the financial center for Asia, and that’s going to take a lot of cooperation on the part of global financial institutions.
I don’t think that Wall Street is as interested in helping US corporations invest in China so much as helping Chinese corporations invest in the United States. Financial liberalization means massive amounts of Chinese money in the United States.
bsetser: perhaps more importantly, so long as China relies on the financial sector to subsidize the cost of sterilization/ the cost of reserve accumulation, it seems to me like there are real limits on financial liberalization.
And if the PRC appreciates the currency so that it doesn’t have to sterilize as much……..
bsetser: Certainly the kind of capital account liberalization we have seen (tighten all kinds of inflow controls while encouraging state firms and state banks to hold fx/ subsidizing their external investors by putting the XR risk on the state’s balance sheet — via swaps and the like) strikes me as very far from what US policy makers should want.
Wall Street is giddy about the prospect of trillions of dollars Chinese money that need to be invested. It doesn’t care what direction the money is going, the fees are the same. If Chinese money provides jobs and keeps plants open, I don’t see too many congressmen complaining.
The only bad part would be if this causes a crisis in the Chinese economy, but the people in charge there have concluded that the current set of policies are the “least bad” ones that are politically feasible.
I’m pretty skeptical that a stock market drop is going to have huge effects because the stock market is a small fraction of the economy, and unlike Japan, banks can’t own stock. Also, I’m dubious about the statistics about Chinese company ownership since I’m not sure that they include the impact of state holding companies.
One thing that I’d like to do is to put up a wiki page that lists statistics that everyone quotes, and to go into detail about where those statistics came from and what they mean.
Counter-privatization, priceless, never thought of it like that. But it’s not just the pendulum swinging back. Nationalization was for autarky’s sake. Re-nationalization, to foreign government concessions that carry out mercantilist policy, hypertrophy of the compradors like Wal-mart – that sounds kind of familiar. Damn. They learned from Macau and they learned from Hong Kong. This is not the Portuguese empire doomed to flop from overextension, this is more like the Crown Colonies. Next comes overseas administrative careers for the growing middle class, coming here to take up the white man’s burden; and preferment for a servile intelligentsia on Lenin’s model. A civilizing influence, some jen. Do us good.
2fish — my guess is that the CIC (And to a lesser degree Chinese SOEs) have enough of a mandate to support China’s own “Development” that they are not going to consistently employ a lot of Americans/ make lots of investment in US facilities — at least not in sectors where uS and chinese firms compete.
I do agree that the street is not very excited by the fees associated with counter-privatization (selling stakes in us companies to state investors in the emerging world). but i don’t view this as particularly positive.
bsetser: 2fish — my guess is that the CIC (And to a lesser degree Chinese SOEs) have enough of a mandate to support China’s own “Development” that they are not going to consistently employ a lot of Americans/ make lots of investment in US facilities
China right now has literally much more money than it can invest profitably within China, and it’s logical to make investments in the United States.
bsetser: at least not in sectors where uS and chinese firms compete.
The old model of national competition is dead. It’s really hard now to identify a specific sector in which US and Chinese firms compete, since everyone now has complex and close relations with everyone else. For example, if GM is producing auto parts on China, who is competing with whom?
bsetser: I do agree that the street is not very excited by the fees associated with counter-privatization (selling stakes in us companies to state investors in the emerging world). but i don’t view this as particularly positive.
Any particular reason?
I do think that it is very positive because it means that economic relations are such that the political divisions in the 21st century are unlikely to be this nation against this other nation, but rather groups A in the US and group B in China versus group C in the US and group D in China.
I think of it less as “counter-privatization” than a new and different set of institutional investors. I’m still unclear why selling holdings to CIC or the Gulf states is fundamentally different from selling stakes in companies to the Ontario Teachers Retirement System.
I think part of it has to do with the difference people how economic theory says that companies are run and how they actually are run, and in particular this non-sense idea that private shareholders drive companies to make profits.
In fact, any shareholder with less than a quarter of the shares in a major public company has essentially no influence on the company, and I doubt that US regulators are going to let CIC have anywhere close to the number of shares they would need to actually have a major impact on corporate management.