Tuesday, May 22, 2007

China's Great Speedbump of Cash

From McClatchy’s article on the US-China strategic economic dialogue now going on in Washington, I learned that China’s immense foreign exchange reserves have earned the nickname "The Great Wall of Cash".

In keeping with China Matters’ kneejerk tendency to question conventional wisdom and conceptual shortcuts, I was compelled to calculate how big a wall of one-dollar bills equal to China’s forex reserves would be.

Based on greenback dimensions of 6” x 2 ½”, 312 bills to an inch,1.2 trillion bills would build a wall 4000 miles from Shanhaiguan to Lop Nor 30 feet wide...

...and 0.55 inches high.

That’s not a wall.

That’s a speed bump.

Despite the fact that China’s greenback barrier is too low to give an invading barbarian even a twisted ankle, Beijing has taken a big step in moving part of its cash hoard into overseas financial markets.

As McClatchy reports:

Cash-rich China rattled the U.S. bond market Monday with the announcement that it was taking a 10 percent stake, worth $3 billion, in the Blackstone Group, one of the world's largest private-equity companies.

Some analysts saw the move as a sign that China intends to diversify from Treasury securities. If true, that could spark investors to demand higher interest rates from Treasuries and could increase the amount of interest that the United States must pay on its debt.

China’s US$ holdings have become a headache for the Chinese government.

There are only a few ways Chinese government bureaucrats can safely and efficiently off-load the billions of trade dollars pouring through the door every month.

Traditionally, the only practical destination was US Treasuries, which made the Chinese government (in their view) hostage to the US government. No matter how annoyed Beijing became with Washington, Bank of China would have to continue to buy Treasuries in order to find a safe haven for its forex, and maintain the value of existing holdings of US debt.

The Chinese government took a small step to allocate central forex reserves through market forces by involving "qualified investors" but I expect was properly anxious about the sticky fingers on the invisible hand.

They also tried to buy our stuff (a.k.a. direct interest in corporations that own or make things) but the CNOOC debacle taught them high profile asset purchases can attract US domestic political opposition and push up the price (or make the deal impossible).

So the Blackstone deal looks like a smart way out of the forex dead end.

Smart, greedy capitalists allocate the capital more efficiently and profitably than any BOC bureaucrat ever could.

They provide the public face of acquisition, with the Yellow Menace just one of many silent partners.

Wall Street types hungry for their bite of the China asset eggroll create a political constuency for a moderate China policy in Washington.

And the Chinese government gets more leverage over the business community through a continual presence as owner, rather than an occasional buyer of US products.

I, for one, would be interested to see if China puts a chunk of change into Cerberus, the investment firm that made big headlines for grabbing the Chrysler anvil and plunging into the deep and stormy waters of the global automotive business.

Cerberus—owned by ex-Secretary of the Treasury John Snow—is also the main shareholder in NewPage Corporation, whose countervailing duty (CVD) complaint was adopted by Treasury to argue the case that China’s paper industry enjoys a de facto subsidy through preferential lending policies by China’s sclerotic state-controlled banks.

It looks to me like this complaint is more likely to seek increased access to Chinese financial markets for US companies as a competition/rationalization measure, than it is to achieve relief for US manufacturers.

In other words, tit for tat.

If China wants to pump forex into our investment houses, we want to do the same over there.

This is a state of affairs that Hank Paulson—who seems to run our China policy these days—can understand, and perhaps even appreciate.

And, so we can better understand--and perhaps appreciate--the US-China trade and economic relationship, I've added China Economics Blog to the blogroll.

5 comments:

David said...

CH,

Also within McClatchy is this piece

http://www.realcities.com/mld/krwashington/17264993.htm

"Swiss police who closely monitor the circulation of counterfeit currency have challenged the Bush administration's assertions that North Korea is manufacturing fake American $100 bills."

The article basically says that it makes neither commerical sense for DPRK to produce these notes, nor are they actually capable of it.

Bender said the same in FAZ in January.

As I noted yesterday, more will come out on this subject...none of which will please UST.

China Hand said...

I blogged on that FAZ story a while back. Kevin Drum's Political Animal posted on the story, but took the approach, If counterfeiting super notes is so illogical, maybe only the North Koreans would be stupid enough to do it. McClatchy's story chose not pursue the FAZ hypothesis that the CIA might be printing the notes to finance some off the books operations.

David said...

The hypothesis being mooted is that the notes were manufactured by a US Government agency to fund any one of several black ops in Asia, Africa and LatAm.

The notes were printed in sufficiently small numbers so as not to endanger the US financial system.

However, they were produced with minor "errors" so as to be deniable (ie proveable fakes).

Thus funding can be acquired for black ops, without Congressional oversight.

The added bonus being that wehn "discovered", any country that the US "dislikes" can be blamed.

David said...

Here is the Swiis report, in German. Page 24 onwards seems to be most relevant:

http://www.fedpol.admin.ch/etc/medialib/data/kriminalitaet/falschgeld.Par.0005.File.tmp/2005%20Jahresbericht%20D.pdf

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