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2 SPEAKING
FREELY The Chinese dollar hoard thunders
forward By William Hawkins
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
contributing.
In his famous
collection of essays Capitalism and
Freedom, the late Milton Friedman made an
argument that has been paraphrased endlessly by
those who dismiss the notion that trade
deficits are a problem.
Postulating a greatly undervalued yen
(1,000 to the US dollar), the Nobel-laureate
economist stated that at such an "exchange rate
the Japanese could sell much to us [the United
States]; we, nothing to them. Suppose we pay them
in paper dollars. What would the Japanese
exporters do with the dollars? They cannot eat
them, wear them or live in them. If they were
willing simply to hold them, then the printing
industry - printing the dollar bills - would be a
magnificent export industry. Its output would
enable us to have the great things in life
provided nearly free by the Japanese."
Forty-five years later, and subject to the
"Wal-Mart effect" that has promoted cheap
consumption to the top priority in economic
policy, this line of reasoning has deteriorated
into an attitude that sees the US trade deficit as
a positive good, as "useless" paper spawned by
low-cost debt is exchanged for real and valuable
goods.
Unfortunately, this clever
faculty-lounge quip is about to run into the harsh
reality of a rising China that wants to remind
monetarists and financiers that its enormous
hard-currency reserve - acquired by a trade
surplus that is partially the result of an
undervalued yuan - represents a vast store of
purchasing power.
China's government took
the first official step on June 27 to inject
US$200 billion into a new company that will buy
assets abroad. Beijing had announced plans in
March, calling it an effort to make more
profitable use of a Chinese hoard of $1.2 trillion
in hard-currency reserves, of which about $400
billion are in US Treasury securities. The
Ministry of Finance will capitalize the fund, and
it will be run by a former finance official.
What will distinguish this Chinese fund is
not just its size, but that it will be a
government entity. As its agents scout the world
for lucrative investments, it will act to draw
private enterprises into government control. It
will enter the market to subvert the market.
Beijing's foreign direct investment has
focused so far on energy and raw materials to
support its expanding industries. China would
prefer to import from itself, owning its overseas
supplies to assure security and avoid market
fluctuations. Importing at the internal cost of
production, rather than a price set by rising
global demand, will give Chinese industry another
edge in world competition.
The attempt by
China National Overseas Oil Co (CNOOC) to buy the
US energy producer Unocal in 2005 set off alarm
bells in Washington. Unocal then accepted a rival
bid from Chevron. To avoid another such
confrontation, the new Chinese fund initially may
limit itself to minority stakes administered by
front companies like the Blackstone Group, into
which China's new agency poured $3 billion just
before Blackstone launched its initial public
offering.
In the longer run, however, a
state-run agency with such enormous reserves will
likely try to use those funds to advance broader
national objectives than merely a few extra
percentage points of return on capital. On June
26, China created an initial $1 billion fund to
finance trade and investment by Chinese companies
in Africa as part of efforts to advance ties with
that resource-rich continent. The fund is part of
Chinese aid and loans to Africa promised by
President Hu Jintao at a Beijing summit with
African leaders in November.
Chinese state
oil companies have expanded aggressively on the
African continent, signing deals in Nigeria,
Angola and Sudan. After a tour through Latin
America in 2004, President Hu promised $100
billion in investments for that region, mostly in
energy, mining and infrastructure projects (the
latter to help ship resources to China). These
resources will be paid for with Chinese
manufactured goods in classic colonial fashion.
Chinese investments have often gone to
shore up radical regimes, thus becoming part of
Beijing's diplomatic offensive to build coalitions
against US "hegemony". At a Darfur conference in
Paris the same week the Africa fund was launched,
the Chinese envoy argued against imposing
sanctions on Sudan for its genocide.
Washington needs to shore up its own
economic defenses in case Beijing turns its
attention again to buying strategic assets in the
United States. Besides resources, China also wants
advanced technology and has shown interest in
acquiring high-tech firms. Beijing has made no
secret of its desire to obtain "dual
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