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Obama in China: The Real Story
By far the most significant news from Obama’s trip to the Far East came before he got there. Speaking at a conference in Beijing just hours before Air Force One arrived, a top Chinese financial official attacked the Federal Reserve, and, by extension, the rest of the American government for stoking another speculative bubble, which could have disastrous consequences for the global economy.
As the Financial Times reported yesterday, Lix Mingkang, China’s top banking regulator, said the Fed’s policy of keeping interest rates artificially low “is boosting speculative investments in stock and property markets and will pose new, real and insurmountable risks to the global recovery and particularly to the recovery in emerging markets.”
In particular, Mingkang said, the Fed’s cheap-money policy was encouraging investors to borrow heavily in dollars and then use the money to buy higher-yielding investments in other countries, such as stocks, bonds, and real estate. This “huge carry trade” was having a “massive impact on global asset prices,” Mingkang insisted.
The Chinese have been grumbling for some time about what they see as America’s irresponsible economic policies, particularly its deliberate effort to devalue the dollar, but this is the first time a senior Beijing official has been so explicit in its criticisms of the Fed.
To be sure, there is an element here of Beijing trying to deflect criticism from its own irresponsibility in maintaining an artificially low exchange rate, but that doesn’t detract from the importance of the growing rift between the United States and its biggest creditor. According to an interesting piece on U.S.-China financial relations by Steven Dunaway, of the Council on Foreign Relations, the Chinese government now owns about $1.6 trillion in dollar assets, mostly in the form of Treasury bonds and other U.S.-backed securities. With every downward lurch of the dollar in the foreign exchange markets, the value of these Chinese assets falls.
It was surely no coincidence, therefore, that Ben Bernanke, the Fed chairman, made a rare comment about the dollar yesterday. (Usually, the Fed chairman leaves the Treasury Secretary to comment on such matters.) Speaking at the Economic Club of New York, Bernanke said the Fed was monitoring the currency markets closely and will conduct policy in a way that will “help ensure that the dollar is strong.”
Whether this will satisfy the Chinese remains to be seen.
Read more:
Obama in China: The Real Story: Rational Irrationality : The New Yorker
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US : National Debt Now Tops $12 Trillion
It's another record-high for the U.S. National Debt which today topped the $12-trillion mark. Divided evenly among the U.S. population, it amounts to $38,974.34 for every man, woman and child.
Technically, the debt hit the new high yesterday, but it was posted on the Treasury Department website just after 3:00 p.m. ET today. The exact calculation of the debt is a 16-digit tongue-twister and red-ink tsunami: $12,031,299,186,290.07
This latest milestone in the ever-rising journey of the National Debt comes less than eight months after it hit $11 trillion for the first time. The latest high-point is not unexpected, considering the federal deficit for the just-ended 2009 fiscal year hit an all-time high at $1.42-trillion – more than triple the previous year's record high.
Much of the increase in the deficit and debt is attributed to government spending outpacing revenue – both exacerbated by the recession and the government response to it – including hundreds of billions in bailouts and stimulus spending and tax cuts along with decreased tax revenues due to rising unemployment.
In recent days, President Obama has spoken of the need to bring the rising deficit and debt under control.
"I intend to take serious steps to reduce America's long-term deficit – because debt-driven growth cannot fuel America's long-term prosperity," he said in remarks prepared for delivery to the leader's meeting last Sunday at the Asia Pacific Economic Cooperation summit.
The National Debt has increased about $1.6 trillion on Mr. Obama's watch, though less than $4.9 trillion run up during the presidency of George W. Bush.
But the White House budget review issued in August projects that by the end of the current fiscal year on Sept 30th, the National Debt could top $14 trillion.
It gets worse. The same document projects that by the end of the decade, the National Debt will hit $24.5 trillion -- exceeding the Gross Domestic Product projected for 2019 of $22.8 trillion.
The new debt number adds urgency to Treasury Department calls on Congress to quickly raise the statutory limit on the National Debt which now stands at $12.104 trillion. The debt ceiling was last raised in February as part of the $787 billion Recovery Act stimulus bill.
The debt also costs a fortune to maintain. In the fiscal year just ended, the National Debt cost taxpayers over $383 billion. And that amount means the government is only paying 3.3 percent interest. If interest rates go up, so does the amount paid on the debt.
And we're paying it to scores foreign countries which hold $3.5 trillion of the U.S. Debt.
China leads the pack holding nearly $800 billion in U.S. Government securities, followed closely by Japan with $731 billion.
Among the smaller nations lending the U.S. money are Luxembourg, Taiwan, Singapore and Ireland.
Mr. Obama has said he hopes the health care plan pending in Congress will serve to curb the growth in the debt by reducing the amount government spends on health care. But it's a claim disputed by critics who say it will have the opposite effect.
National Debt Now Tops $12 Trillion - Political Hotsheet - CBS News
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Obama Invites Chinese Banks to Buy American Banks
President Obama may return from his trip to China this week with some sorely needed help for ailing U.S. banks: buyers.
The South China Morning Post reports today that American and Chinese government officials are negotiating an agreement to spur lenders in the People’s Republic to acquire small and midsize banks in the U.S. (registration required). The sides hope to announce the deal before Obama wraps up his visit on Wednesday.
The [agreement], if announced, would signal a significant turnaround of Washington’s stance towards Chinese investment in the U.S. and also comes at a time that cash-rich China, with more than US$2 trillion worth of foreign exchange reserves, is buying overseas assets aggressively.
“Turnaround” is putting it mildly. The U.S. has tied itself in knots in recent years fending off Chinese companies eager to buy American enterprises. Most notably, when Chinese state-owned oil company CNOOC in 2005 bid $18.5 billion in cash to buy California’s Unocal, American lawmakers erupted. Dangerous to national security! A giveaway of vital natural resources! Those people eat chicken feet! (For the record, they’re delicious.)
The Committee on Foreign Investment in the United States, a multi-agency government panel that assesses cross-border mergers, eventually nixed the deal. Grandstanding pols may have been pleased, but Unocal shareholders probably weren’t — CNOOC’s offer easily topped a rival bid for Unocal by another American oil company, Chevron, which eventually walked away with the prize. Chinese telecom gear maker Huawei last year abandoned a joint deal for 3Com merely on the risk that CFIUS might block the transaction.
Such flaps recalled concerns about Japanese investment in the U.S. in the 1980s (U.S. authorities went so far as to make it harder for Japanese corporate employees to get visas to work stateside.) Such episodes reveal growing American anxiety about challenges from powerful economic rivals, as well as our place in a multi-polar world. An important difference, however, is that while Japanese companies work hand-in-hand with their government, many of China’s large enterprises work hand-in-fist as state-controlled entities.
Another contrast has to do, of course, with the countries themselves. Japan Inc., mired in its “lost decade,” soon fizzled. But China, while certain to see many ups and downs in coming years (especially on the political front), is a budding superpower. And the country’s rise is surfacing a deep American ambivalence toward China over whether it is best viewed as a free-market friend or a Cold War-era foe.
Certainly, China’s involvement in the U.S. economy is double-edged. Beijing’s taste for Treasury securities and other U.S. debt has kept the American economy afloat. But as our trade deficit shows, it has also encouraged us to live well beyond our means. More broadly, the huge inflows of foreign capital in the U.S. that began in the mid-’90s facilitated the ensuing financial bubble by depressing interest rates.
Despite such concerns, there’s a strong economic case for inviting Chinese banks to enter the U.S. (In the interest of semi-brevity, I’ll withhold my opinion on how China’s human rights record should figure in the matter.) For one thing, they’re already here. Minsheng Bank bought a roughly 10 percent stake in San Francisco’s UCBH Holdings, which operated the United Commercial Bank, in 2007.
Notably, Minsheng, which has more $130 billion in assets, isn’t state-run — in 1996 it became the first private commercial bank in China. The company emerged from banking reforms instituted by Chinese authorities in the 1990s to modernize the country’s financial system. Other changes, prompted in part by China’s joining the WTO, included the adoption of market-based interest rates and a move to loosen control on foreign exchange.
Foreign banks have been making acquisitions in China for a while now. The biggest such investor is HSBC. By 2008, the U.K. financial giant had spent $5 billion to buy stakes in a range of mainland companies, including Bank of Shanghai and Ping An Insurance. In 2007, HSBC formed HSBC Bank (China) in Shanghai as a wholly foreign-owned bank.
Citigroup, whose business on the mainland dates back to the early 1900s, owns a nearly 20 percent stake in Shanghai Pudong Development Bank, just below a government limit on foreign ownership of domestic banks. Citi also has a piece of Guangdong Development Bank. In addition, four major Chinese banks — the Bank of China, Bank of Communications, China Construction Bank, and Industrial and Commercial Bank of China — have attracted a slew of overseas investors.
For now, the growth of Chinese banks in the U.S. is unlikely to provoke the same hand-wringing as CNOOC’s designs on the American oil patch. The agreement being hatched between Washington and Beijing concerns smaller banks, not global ones. More important, the U.S. desperately needs willing buyers to mop up injured banks, more of which fail every week. The federal Public-Private Investment Program, which is aimed at helping banks cleanse their portfolios of toxic assets, is only slowly gaining speed. U.S. banks and investors are moving in, but not quickly enough.
If Chinese financial companies pass on the chance to buy American, it’s unlikely to be because of nationalist sentiment here at home. That’s passing. Recently, for example, China’s sovereign wealth fund bought a $2.2 billion stake in Virginia energy company AES, with nary a whimper from Congress.
Rather, it will stem from a healthy sense of caveat emptor. United Commercial Bank closed earlier this month, taking Minsheng Bank’s investment down with it. As one Chinese banking executive told the Morning Post, “The U.S. side is very keen for the mainland banks to invest, but we are very cautious.”
Obama Invites Chinese Banks to Buy American | BNET Financial Services Blog | BNET
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Obama: China has helped US pull out of recession
BEIJING — President Barack Obama says that China's partnership has helped the United States pull out of the worst recession in a generation.
Obama and Chinese President Hu Jintao appeared together and spoke to reporters after a pair of meetings on Tuesday. Obama says a revised economic approach will help increase U.S. exports and create jobs while helping bring about higher living standards in China.
Obama says his government is committed to a strategy of spending less and saving more.
The United States' budget deficit is soaring to a yearly record of $1.42 trillion and China is the No. 1 lender to Washington. Beijing has expressed concern that the falling price of the dollar threatens the value of its U.S. holdings.
The Associated Press: Obama: China has helped US pull out of recession
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China Can't Kill The Dollar
Before President Barack Obama touched down in China for his three-day visit this week, the country's top banking regulator joined the ranks of those complaining about the U.S. Federal Reserve's low interest rates and the falling dollar. The combination, said Liu Mingkang, has fed speculation in stock and property markets (especially in Asia) and threatens the worldwide economic recovery.
What can China do about it? As long as the country banks on Americans to buy Chinese products, economists say, not much.
"They don’t have any credibility," said Dan Greenhaus, chief economic strategist at Miller Tabak. China has played the same game for years, keeping its currency cheap so that other countries will buy its goods. The U.S. certainly cares about what its largest creditor thinks, Greenhaus said, but has little reason to change course. A cheaper currency boosts U.S. exports, just as it does for China, and the Federal Reserve won't raise rates at the risk of choking the economy.
The two countries are effectively locked in an embrace: China buys U.S. debt and the U.S. buys China's goods. "It's a symbiotic relationship," Greenhaus said.
The Fed has kept interest rates low to spur borrowing and encourage economic growth, thereby creating a new carry trade. Investors borrow cheap dollars and lend them in a currency from a country with a higher yield and then pocket the difference. The Dollar/Aussie carry trade has been especially popular since the Australian central bank raised interest rates to 3.5%. Each trade sells U.S. dollars to buy Aussies and helps push the dollar lower and the Aussie higher. Remember this next time an analyst says that the Aussie is climbing because Australia is commodities-rich--there's some truth to it, but there's also some momentum at work.
When the dollar falls, China rushes into the market to keep its currency close to 6.84 to the dollar, selling the yuan to buy assets priced in dollars. Letting the dollar weaken against the yuan would make Chinese products more expensive to American consumers, so China keeps its currency pegged and, as a result, has piled up more U.S. debt than any other country. At last count, China held $797 billion in Treasury securities, up from $573.7 billion in August 2008.
The largest creditor to the U.S. would appear to have plenty of leverage, the ability to wreak havoc if it doesn't get its way. The nightmare scenario, as imagined by the doomsayers, has China selling off its vast store of Treasury notes or maybe refusing to show up to the next Treasury auction. Yields on Treasury debt skyrocket, the U.S. defaults and Americans wake up in a Cormac McCarthy novel.
But in reality, China has too much to lose to make any rash moves, said Carl Weinberg, chief economist at High Frequency Economics. If it stopped buying U.S. debt, the value of its $797 billion Treasury hoard would plummet along with the dollar. A soaring yuan would also hurt exports, which have dropped for 12 months in a row. That's one reason China rejects cajoling from the Obama administration to let its currency float freely.
If it wants to fight an asset bubble, the People's Bank of China could begin raising rates by the middle of next year, say researchers at JPMorgan Chase. And the bank recently hinted that it would allow for more flexibility in its exchange rate. Don't expect much. JPMorgan's researchers estimate one dollar could fetch 6.5 yuan by the end of next year.
China Can't Kill The Dollar - Forbes.com
