I recently wrote a piece for an eMag my employer publishes in which I discussed China's investments in the US and related matters. Two of the experts I interviewed for this story made unflattering references to a bill on "currency manipulation" now before the US Senate, a bill sponsored by Senator Christopher Dodd, of Massachusetts.
Naturally, I offered the Senator, through his office, every opportunity to respond to these comments. In fact, I formulated the gist of them into five specific questions.
The replies I got from his staff members were unfailingly polite and unfailingly unproductive of any reply, either in time for inclusion in the eMag piece or subsequently.
Okay, the Senator's a busy guy. He's busy managing a much-ignored Presidential candidacy and all that. Still, I'm going to post the questions here, because its as good a form of typing practice as any.
1. Is currency manipulation (or misalignment) really a large factor in the US/China trade imbalance? Wouldn't there be a huge imbalance in wage levels at any plausible yuan/dollar rate of exchange? And if China disappeared from the picture, wouldn't a lot of the manufacturing/outsourcing simply move to Vietnam, Indonesia, or elsehwhere -- again for wage rather than for currency-specific reasons?
2. One view I encountered, in discussing the matter with experts, is that the US has made a virtue of necessity by making a diplomatic push for the free float of every currency against every other currency. From the Bretton Woods period until the Nixon administration, fixed rates of exchange were US policy, after all. Does your bill assume that everything must float freely against everything else? If so, why? Given the volatility such a situation allows (as exhibited starkly in east Asia just ten years ago) aren't there good reasons why a particular sovereign nation might want to avoid convertibility altogether?
3. I understand that the Financial Times may soon run a letter-to-the-editor from several economists -- including, for example, T.J. Marta, fixed income analyst, Royal Bank of Canada -- who maintain that Senator Dodd and the other sponsors of the bill "audaciously pretend to have a certainty over something that's fundamentally uncertain." The bill, the letter says, is plainly directed at China, yet there is no certainty that the yuan and dollar are badly misaligned, intentionally or otherwise. Would you like to respond to that general critique?
4. Although there seems to be a majority view, among observers of the question, to the effect that if the yuan were freely convertible and allowed to float, it would strengthen vis-a-vis the US dollar, there is also a contrarian view expressed by some experts, that the yuan would fall. This is (the contrarian theory goes) in part because China's elites would likely prefer to keep their own money offshore, and in other nation's denominations, and in part because foreign corporations doing business in China would likely find it easier to repatriate their profits by holding them in dollars, or something other than the yuan. If the yuan is in fact over-valued already relative to the dollar, isn't any alleged manipulation working in favor of the US?
5. Do you see the investment this year by a China state agency of $3 billion in an American investment fund management firm as a good sign of mutual interdependence, of the repatriation of dollars, etc.? Or is it ominous, as many thought when China considered the purchase of Unocal? Are the Blackstone/Unocal cases markedly different?
Showing posts with label Blackstone. Show all posts
Showing posts with label Blackstone. Show all posts
04 August 2007
26 May 2007
China's Foreign Reserves
The People's Republic of China is sitting on cash. It is holding foreign-exchange reserves of more than $1 trillion (pronounce that "t"!). That is twice the amount of the PRC's reserves just two years ago.
According to The Economist, that $1 trillion is enough money to buy all the gold in all the vaults of the central banks of the world.
Such games-playing with numbers is fun, but there would be operational problems with the gold-buying spree as a policy. Might the money be used for infrastructure projects -- roads, bridges, water treatment plants? The problem is that by employing such money domestically China would inflict upon itself an inflationary spiral (inflation, remember, is too much money chasing too few goods).
China wants to invest its reserves in the rest of the world, and has decided to do something more adventurous than just buying U.S. Treasury bonds. In recent days, it announced that it's buying billions of dollars worth of non-voting equity in a US based private-equity firm, The Blackstone Group LP. Its important to note that this isn't an investment into one of the funds that Blackstone manages, but an investment in the management firm itself. (Its like buying stock in a bank rather than simply opening an account there.)
The easiest observation to make about all this is that a country still formally Communist in doctrine is now investing in a quintessentially capitalist institution. But of course the PRC's devotion to communism has been mostly lip service now for a long time, so this surprises no one.
A more speculative line of thought: what now happens to the market for US Treasuries? It's been my impression that China's enormous appetite for the stuff has been a large part of the market demand, and that this market demand is what has allowed the US government to deficit-spend itself silly in recent years with no real detrimental consequences. But what if China doesn't want the IOUs from Uncle Sam anymore? Who else will?
That's not a very pressing concern, though, because China's foreign reserve is plenty large enough to absorb those IOUs and leave a stray three billion on the side for the Blackstone deal, too. But if its a straw in the wind, then the wind could be troubling.
We should also say that China and Blackstone were both very careful, in the announcement of the deal, to specify that these were non-voting shares. The PRC thereby avoids the diplomatic consequences of appearing to 'take over' an important US based company. It learned this lesson, I'm guessing, from the recent Dubai port-management imbroglio.
It'll be nearly 10% of Blackstone's equity, though. So, whatever the formalities of voting, I suspect that the Chinese agency involved will have a seat at the table when important decisions are made.
This is a fascinating straw, at the intersection of a lot of different winds. The integration of the economy of the PRC into that of the rest of the world might prove to be the big economic/financial story for decades to come.
According to The Economist, that $1 trillion is enough money to buy all the gold in all the vaults of the central banks of the world.
Such games-playing with numbers is fun, but there would be operational problems with the gold-buying spree as a policy. Might the money be used for infrastructure projects -- roads, bridges, water treatment plants? The problem is that by employing such money domestically China would inflict upon itself an inflationary spiral (inflation, remember, is too much money chasing too few goods).
China wants to invest its reserves in the rest of the world, and has decided to do something more adventurous than just buying U.S. Treasury bonds. In recent days, it announced that it's buying billions of dollars worth of non-voting equity in a US based private-equity firm, The Blackstone Group LP. Its important to note that this isn't an investment into one of the funds that Blackstone manages, but an investment in the management firm itself. (Its like buying stock in a bank rather than simply opening an account there.)
The easiest observation to make about all this is that a country still formally Communist in doctrine is now investing in a quintessentially capitalist institution. But of course the PRC's devotion to communism has been mostly lip service now for a long time, so this surprises no one.
A more speculative line of thought: what now happens to the market for US Treasuries? It's been my impression that China's enormous appetite for the stuff has been a large part of the market demand, and that this market demand is what has allowed the US government to deficit-spend itself silly in recent years with no real detrimental consequences. But what if China doesn't want the IOUs from Uncle Sam anymore? Who else will?
That's not a very pressing concern, though, because China's foreign reserve is plenty large enough to absorb those IOUs and leave a stray three billion on the side for the Blackstone deal, too. But if its a straw in the wind, then the wind could be troubling.
We should also say that China and Blackstone were both very careful, in the announcement of the deal, to specify that these were non-voting shares. The PRC thereby avoids the diplomatic consequences of appearing to 'take over' an important US based company. It learned this lesson, I'm guessing, from the recent Dubai port-management imbroglio.
It'll be nearly 10% of Blackstone's equity, though. So, whatever the formalities of voting, I suspect that the Chinese agency involved will have a seat at the table when important decisions are made.
This is a fascinating straw, at the intersection of a lot of different winds. The integration of the economy of the PRC into that of the rest of the world might prove to be the big economic/financial story for decades to come.
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