China's investing woes

Posted By Phil Levy Friday, September 16, 2011 - 11:30 AM Share

For those who believe it is just a matter of time before China rides its commercial success to global hegemony, this week offered some compelling imagery: Europe, on its knees, reeling from political discord, rising bond yields, and bank downgrades; China, sitting atop its $3.2 trillion hoard of foreign exchange reserves, condescending to dictate the terms of European surrender.

Of course, Chinese Premier Wen Jiabao was not so tactless as to describe it as surrender. He actually expressed a "readiness to extend a helping hand and a readiness to increase (Chinese) investment in Europe." It wouldn't hurt, he went on, if Europe should decide to grant China market economy status, effectively lowering trade barriers.

Fareed Zakaria translates this into great power politics terms:

In a world awash in debt, power shifts to creditors. After World War I, European nations were battered by debts, and Germany was battered by reparation payments. The only country that could provide credit was the United States. For America, providing desperately needed cash to Europe was its entry into the councils of power, a process that ultimately brought a powerful new player inside the global tent. Today's crisis is China's opportunity to become a 'responsible stakeholder.'"

That's a twist on the original conception of what it meant to be a responsible stakeholder, but no matter. This interpretation falls apart as soon as one scratches at it a little.

The idea that a big infusion of Chinese cash would set Europe aright misinterprets the problems facing the Eurozone. Although the troubled countries there -- Greece, Ireland, Portugal, Spain, and Italy -- each took their own paths into difficulty, they are all in unsustainable fiscal situations. These require difficult choices about future taxes and spending, not just a quick bridge loan. Oddly enough, Zakaria recognizes this early in his piece, when discussing the implausibility of a "eurobond" solution, under which France and Germany would effectively co-sign loans taken out by their neighbors:

The minute such bonds are floated, Italy, Greece and the others would lose all incentive to make painful reforms; they could borrow all the money they need at German-subsidized rates, so why go through the dreary work of restructuring? The Germans know this -- hence their opposition."

Yet Zakaria plows ahead with the idea that a Chinese bailout would be qualitatively different than a German bailout. The Chinese are under no such illusions. Bloomberg quoted the Chinese premier:

Countries must first put their own houses in order," Wen said (Wednesday) at the World Economic Forum in the Chinese city of Dalian. "Developed countries must take responsible fiscal and monetary policies."

While there might be symbolic appeal to the idea of China riding to Europe's rescue, the reality would be less romantic: a relatively poor country would be sending its savings to a collection of wealthy ones. Moreover, to be useful, China would have to be willing to stockpile the Spanish and Italian bonds that are scaring everyone else. Jamil Anderlini of the Financial Times nicely documents Chinese reluctance to take on that role. 

In fact, it sounds as if the Chinese have already demurred. One adviser to China's central bank said explicitly the country should refrain from buying too many European bonds. While there are reports of Italians making sales pitches to lure Chinese investment, they do not seem to have gotten very far. Despite Wen's offer of a helping hand, the Financial Times story reports:

...analysts and European officials say China's actual purchases of Greek, Portuguese, Spanish and Italian bonds have been quite limited and its Euro-denominated foreign reserves are overwhelmingly invested in much safer German debt."

It is tempting to see China's foreign exchange reserves as a massive political war chest, but so far the Chinese have been unwilling to use the stash for anything more than token gestures. China seems to be acting more like a worried investor than an aspiring hegemon.

STR/AFP/Getty Images

EXPLORE:FLASH POINTS, CHINA, ECONOMICS
 

TANYA_M

8:04 PM ET

September 16, 2011

Countries Need to Think Twice

There is a reason why China, which some believe to be a poor country, has funds available to help bail out other countries. It's because their workers earn little and receive few protections. By granting China market economy status, the nations that have lost millions of jobs to China would essentially be hammering the nail in their own coffins.

Just go to the store and see what you can buy that is not made in China. From kids toys, to lesser known items such as pulse oximeters, merchandise that we purchase is not made here at home. And for an economy, which supposedly is driven 70% by consumer spending, we are watching hundreds of billions of dollars flow out to countries like China each month.

Nations would be in a far better off economically if they addressed trade and how trade policies with China are hurting nations. Besides the immediate economic impact, China's requirement for some American companies to hand over blueprints for technology (GM, GE, etc.), China has proven many times over that fair trade is not possible with them.

 

JAMESLIP

5:15 AM ET

September 17, 2011

Chinese

I agree to Tanya,

China seems to like being the grandfather striving to rescue the countries that are on the edge, financially and economically.

I can tell you from my life experience that when grandfather would bail me out of any troubles I would find myself in a difficult situation in terms of interests.

But I can tell you that the Chinese are learning more and more how to reach their economical goals worldwide in a clever manner. Look at the mines in Africa, or the rice paddies in SEA which get bought up by the Chinese.

The grandfather would dictate what rules and what happens, and plan a clear payback schedule to make totally sure that their interests get put into action and the money gets paid back. China will surely do the same.

J.

 

JDMENGINES

2:20 AM ET

September 19, 2011

I agree as well but not

I agree as well but not everyone thinks that way

 

MITTAL

1:31 AM ET

September 17, 2011

Don't Worry Europe, India will save you

We Indians will work harder than thes bad bad chinese, at 99cents/hour.

You can ship all your factories to India, and entrust your technology to us, and not worry bad bad china might steal them.

We Indians are very smart and speak King's English properly, and are all natural born Technie Gurus, of course.

So Never any fear of technology being stolen, since we are smarter than anybody else anyway.

As a matter of fact, all high tech ideas originated with us Indians in the first place.

 

ALISON C

6:14 PM ET

September 17, 2011

Last resort

I truly hope that taking factories to these destinations is a last resort. Cheap but at what real cost?

 

MARTY MARTEL

6:04 PM ET

September 17, 2011

China will replace US despite its investing woes

With China having trade surplus with so many countries in the world, China’s foreign exchange reserves will keep increasing in spite of its investing woes.

Actually world history will record last forty years as the most momentous for the very fact that balance of power has started to shift from West to East because of West’s leader embracing China to counter Russia in 1972.

While Russia could NOT make Communism to work, China rose to super power status precisely because of Communism and Nixon offered a one hell of an opportunity to China to make economic progress possible in return for China temporarily shacking up with U. S. to checkmate former Soviet Union.

Afterall China was a pariah country in the world just like today’s North Korea until Nixon’s 1972 visit. All the West European and East Asian countries stayed away from China following the US lead until 1972 and embraced China after Nixon’s visit. While US would not give MFN status to Soviet Union (remember Jackson-Vanik amendment?) unless Russia shed Communism, it had no problem giving it to China’s Communist dictators with a capitalist mask. Trade with China expanded by leaps and bounds during 12 years of Republican rule beginning in 1981. After campaigning against butchers of Beijing in 1992 elections, even Bill Clinton became enthusiastic supporter of trade with China once he took lessons in foreign policy from Nixon in early 1993 during a special Whitehouse-arranged meeting. US also promoted China to a super power status by accepting it as a permanent UNSC member.

Had it not been for that Nixon embrace in 1972, China’s rise to super power status would have been far more slower with all the US, West European and East Asian markets closed to cheap Chinese products. Had it not been for that Nixon embrace, China’s technological progress would have been far slower in the absence of West’s technology transfers. Had it not been for that Nixon embrace, China’s military progress would have been far slower in the absence of huge forex reserves that China accumulated from the massive exports of cheap Chinese products and China used those forex reserves to acquire latest military technology.

As such U. S. has strengthened Communist Party’s hold on Chinese society by embracing Mao’s China - that embrace has afforded Communist Party to create millions of jobs for its hungry masses, replacing the frustrations of poverty that could ignite mass revolt. Even 1989 Beijing massacre did NOT stop democratic U. S. to divorce Communist China, China had already become that important to U. S. economy by that time.

Now China has US by the tail - US businesses are hooked to huge profits that cheap Chinese products generate for them as a walk through any Walmart, Home Depot, Sears and Macy’s filled with Chinese goods prove and US government is hooked to huge investments that China makes in US governmental securities from the sales of cheap Chinese products to US businesses.

China’s power is multiplying day by day and now there is NO power on earth capable to stop China, least of all U. S.

Little could Mao or Deng have imagined that by wearing a capitalist mask, their followers will beat capitalists at their own game. Lenin used to say that ’capitalists will sell us the ropes with which we will hang them’. With West selling such proverbial ropes in the form of technology transfers, Chinese Communists have proven that Lenin saying quite prophetic.

It behooves China to erect the statue of anti-Communist Nixon right next to die-hard Communist Mao in Beijing for speeding up China’s rise to super power status.

 

MOLZ

1:33 PM ET

September 19, 2011

@MARTY MARTEL

Really, China rose to super power *because* of its Communism? That's either blatant misinformation or misunderstanding regarding history.

China was an impoverished, broken economy prior to reform and opening up...coincidentally when it shed the last vestiges of actual Communism or Socialism. The whole ??????????, socialism with Chinese characteristics, is just a propaganda name to rationalize why the "Communist party" should remain in control of an authoritarian capitalist regime.

I mean hell, northern Europe and Canada, with government provided medical insurance and other services both qualify as more "Socialist" than China. So please do enlighten me - in a country that has no comprehensive medical care, a country who has one of the largest (if not the largest) gap between the haves and the have nots, both general numbers and as a percentage of the population, what about China is Communist?

We need more rational commentary on this blog and less from the 50 cent party. Is nowhere safe nowadays without their inaccurate and slanted views on reality?

 

LYLH76

2:46 PM ET

September 19, 2011

welcome to http://www.lovetoshopping.org

Wonderful.

Share a website with you ,

(======= http://www.lovetoshopping.org =======)

Believe you will love it.

accept paypal free shipping
Cheapest DG Shoes,Discount Brand Purses,Baby Phat Clothing

 

JEFFGREEN

11:22 PM ET

September 19, 2011

re

China used to be the place for cheap labour but know its becoming more expensive they have more wealth, resources than the united kingdom before long people in the uk will be making t-shirts for the far east countries. we have a few big industries such as airports but nothing much anymore. Wouldnt be suprised if china invaded us in the future with russia.

 

NATASHAV

6:06 AM ET

October 15, 2011

As such U. S. has

As such U. S. has strengthened Communist Party’s hold on Chinese society by embracing Mao’s China - that embrace has afforded Communist Party to create millions of jobs for its hungry masses, replacing the frustrations of poverty that could ignite mass revolt. Even 1989 Beijing massacre kindle fire review did NOT stop democratic U. S. to divorce Communist China, China had already become that important to U. S. economy by that time.

 

Shadow Government is a blog about U.S. foreign policy under the Obama administration, written by experienced policy makers from the loyal opposition and curated by Peter D. Feaver and William Inboden.

Read More