A sign of China’s ascension to global supremacy – NOT!

The media likes stories of suspense, intrigue and conspiracy, at least that’s what you could conclude from the latest article by the UK Telegraph “China wins from credit crunch fallout” (29/11/2007) according to the Special investigation by Telgraph staff Peter Koenig, Gordon Rayner, Katherine Griffiths, James Quinn, Mark Kleinman, Edmund Conway, Jonathan Sibun, Philip Aldrick, Andrew Porter, Robert Winnett, James Kirkup and Iain Dey. Original source: www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/11/28/ccrock128.xml. Rarely does one get the chance to attend a lynching, so let me be the first to invite you.
The article says that “China may in the end be the biggest winners from the credit crisis”. Take it as fact – no one benefits from a credit crisis, unless you are talking about the opportunists who buy up cheap assets in the aftermath. Yet this article would suggest that Chinese central bankers are astute investors by assembling a cash reserve of $US1.3 trillion at a time of financial crisis. But consider this – they have been assembling this reserve for the last decade, earning on average 2% and to top it off, they are over-exposed to a falling currency. In the same 10 year period US fund managers have been earning 20% on global equities, including China’s.
Notwithstanding that its nice to have a pile of cash at a time of currency, most central banks have a diversified portfolio. Any hint that China was going to sell its portfolio of US bonds would precipitate a collapse in bond prices. So far from being an opportunity, its really a prison sentence. The idea that this decision has “hasten the transfer of economic power from Europe and the US to Asia”, the reality is that it has slowed it. China’s savings are under-invested.
Having said that, there is no question that China is a force to be reckoned with. Not because of its astute investing, but rather because it’s a huge population of poor people, with a pretty good worth ethic. China set its strategy more than a decade ago, so you can’t argue its astute for cashing up for the ‘sub-prime crisis’ because the strategy predates it. You can’t even argue that China “has deliberately insulated itself against the boom and bust cycles of the capitalist West by building up the greatest cash fortune ever assembled” because it has participated in the boom in 2 respects:
1. Chinese investors are even more exposed to the property market because of the huge gains there. The difference of course is that relatively few Chinese can afford property, and that property fundamentals are stronger there, but I doubt they are secure from falling housing prices and higher interest rates, particularly since currently rates are subsidized.
2. Chinese people are exposed to the US property market through its export-orientated economy. The final demand for a lot of Chinese-made products is the USA and the EU, which is now impacted by weak Asian currencies.

The truth is that China is challenging the USA and EU but only by virtue of its cheap labour. Strangely it not the Chinese singing the praises of China, it’s the western media. It reminds me of the Cold War, when Russia was built up as a threat to western supremacy. The greenhouse issue has a similar stench attached to it. A stench that sells newspapers, creates fear, creates a story.
China will benefit from an market correction not because of its huge cash reserves, but because it has amongst the lowest unit labour costs in the world. When excess capacity is being closed, Chinese capacity will be amongst the capacity remaining open. But don’t forget – all remaining capacity (including the Chinese) will suffer the impact of subdued demand. All factories will experience lower prices, low profits. In fact the event might even force the Chinese government to end its support of the USD.
If the Chinese were canny investors they would have invested in global resource companies about a decade ago, and precious metals at least 5 years ago. On the contrary it has just started doing that. That is despite western media talking up the opportunities in resources for 2 decades. The ascension of China and India was predicated on their liberalization. It has a simple law of cause and effect. So there is nothing new in the idea that Asia has growing prosperity, and thus growing influence in global politics.
Yet if you listen to the Telgegraph, they make it sound like China is engaged in a clandestine act to take over the world. Makes you wonder whether the western media functions as the Dept of Western Propaganda. If you want a conspiracy theory, I would see more merit in that. We often hear that China is the ‘bad guy’ for buying USD, but the reality is that the US government wouldn’t have it any other way. They afterall want their deficit funded, and the presence of Chinese money keeps US debt cheap and available in abundance.
The reason why China had little exposure to the ‘sub prime crisis’ was because the $1.3 trillion is forex reserves, which are invested in highly liquid assets, not commercial debt, so no surprise that the Chinese didn’t invest there, no central bank does. It was only recently that Chinese fund managers (insurance companies) have been allowed to invest abroad. So there was little opportunity if they even wanted to.
The suggestion that “China's capital walls had largely insulated the country's banking sector from the crises elsewhere” is also not true, it was their well-understood lack of exposure. And the fact remains that China is still part of the global economy exposed to lower prices.
Even the suggestion that “we have seen a flight [of money] to East Asia in recent months” is incorrect because it suggests that Asia remains a bastion of strength. Funds will return to East Asia because the Japanese carry trade is being wound back by rising credit spreads. That is why the Japanese currency is stronger, but the rest of Asia, not particularly strong. Where it is strong, it has more to do with the weak USD.
It is true that the Asian debt crisis in Thailand, Indonesia, Malaysia and South Korea was precipitated by high debts and inadequate forex reserves, but that has not been the rationale for the build up in China’s US treasury holdings. Certainly China is stronger today because it always had the stronger fundamentals, but then Indonesia, Vietnam and India are stronger still.
The notion that China having the world’s biggest company PetroChina, is some sort of symbol of China’s ascension is folly, as really the fact that these developing countries have such big coporations is really a legacy of their government-sponsored monopoly policy, thus they are more a legacy of old, rather than new.