Thursday, April 16, 2009

China's Checkbook Diplomacy

As President Obama plans to meet Latin America's leaders this weekend, China has recently negotiated deals to double a development fund in Venezuela to $12 billion, lend Ecuador at least $1 billion to build a hydroelectric plant, provide Argentina with access to more than $10 billion in Chinese currency and lend Brazil’s national oil company $10 billion. The deals largely focus on China locking in natural resources like oil for years to come, according to the New York Times.

As a result of rapidly growing ties and trade, China has already become Latin America's second largest trading partner after the United States.

Beyond locking in the natural resources for its growing industries and developing new export markets, China is also focusing on expanding its own internal consumption of products it produces. Already, China has surpassed the United States as the largest automobile market in the world. In comparison with the rest of the world, the Chinese market for automobiles appears to be relatively robust. Monthly auto sales in China surpassed those in the U.S. for the first time in January, but automakers and industry watchers say the news may tell us more about the troubles in the U.S. than about China's growing car market, says a report published in San Francisco Chronicle.

Data released in February by the China Association of Automobile Manufacturers shows 735,000 new cars were sold in China last month, down 14.4 percent from the record of 860,000 set in January 2008. U.S. sales, meanwhile, fell 37 percent to 656,976 vehicles — a 26-year low. Some analysts believe U.S. sales may fall to about 10 million vehicles this year.

Worrying about the shifting balance of power in Latin America while the US is preoccupied with crises in Afghanistan and the Middle East, David Rothkopf, a former Commerce Department official in the Clinton administration, told the New York Times, “The loans are an example of the checkbook power in the world moving to new places, with the Chinese becoming more active.”

While the Chinese have been actively engaged for years in raising their profile and influence in Asia and Africa, the rising Chinese presence in Latin America seems too close for comfort for the US.

It is estimated that the continuing trade surpluses for years have helped China amass a whopping two trillion US dollars in dollar-denominated assets. Last year alone, China added US$450 billion to its reserves at a rate of over a billion dollars a day. About half of the Chinese US dollar-based assets are in the form of US treasury bonds that fund the ballooning US deficits.

Gao Xiqing, president of the China Investment Corporation, recently told James Fallows of the Atlantic Monthly, "Be nice to the countries that lend you money". Gao was clearly hinting at this new reality of " balance of financial terror" shifting in China's favor.

If history is any guide, the power of the lender over debtor nations is not just theoretical. The key moment when the world leadership passed from Britain to the United States came during the Suez crisis of the 1950s as a result of Britain's large WWII debt owed to the United States. When Britain, France and Israel invaded Egypt to take control of the Suez canal, the US President Eisenhower warned the British that unless they withdrew, he would order the sale of the United States' currency reserves of British Pounds and Sterling Bonds; thereby precipitating a collapse of the British currencies' exchange rate. Eisenhower in fact ordered his Secretary of the Treasury, George M. Humphrey to prepare to sell part of the US Government's Sterling Bond holdings. The British withdrew and ceded the control of the Canal to Egypt.

“This is China playing the long game,” said Gregory Chin, a political scientist at York University in Toronto. “If this ultimately translates into political influence, then that is how the game is played.”

Related Links:

China Sees Opportunities Where Others See Risk

Chinese Do Good and Do Well in Developing World

Can Chimerica Rescue the World Economy?

16 comments:

Anonymous said...

China is exactly going the way in which america went. Using the fund as a weapon cannot run for a long time as it affects the domestic consumption which will force politically for china to look inward.

Any slow down in us will have such a bad effect as china has not created a middle class for an internal market to consume the produces.

Riaz Haq said...

Anon: "china has not created a middle class for an internal market to consume the produces."

I disagree. China has already surpassed US to become the world's largest auto market ..a good sign of a strong middle class with growing consumer demand.

Anonymous said...

https://www.cia.gov/library/publications/the-world-factbook/print/ch.html

GDP (purchasing power parity):
$7.8 trillion (2008 est.)
$7.104 trillion (2007)
$6.475 trillion (2006)

GDP - per capita (PPP):
$6,000 (2008 est.)

https://www.cia.gov/library/publications/the-world-factbook/print/us.html

GDP (purchasing power parity):
$14.29 trillion (2008 est.)
$14.11 trillion (2007)
$13.83 trillion (2006)

GDP - per capita (PPP):
$47,000 (2008 est.)

China's per capita income is 6k vs. 47k of usa which indicates the consumption capacity of the citizens. So a slow down on consumption by america will affect the export oreinted economy. This has already been seen in case of japan.

China is yet to create the middle class consumption econocy.

Riaz Haq said...

Anon: "China is yet to create the middle class consumption econocy."

I agree. But China is growing its internal consumption as shown by the auto sales now exceeding those in US.

But Asians in general, and Chinese in particular, are big savers. They save as much as 40% of their income which gives them a lot of funds to invest or lend. In fact, they have been supporting the big spending habits of America by lending vast sums in the last decade.

But the Chinese are well on their way to becoming a substantial domestic consumer market, rivaling any other by the dint of their sheer size. I have seen it up close by visiting the massive Wallmart stores opening up in China.

Joachim Martillo said...

I discuss international political effects of economic power in In Re: Partition Still Casts Shadow On India-Pakistan Ties.

Anonymous said...

Raiz,

Further issues of china is that it is reducing organized labout cost to keep its product cost low, which is resulting in lower income for people to spend.

china has to go a long way for the labour to get his market value for work. When that happens, income get distributed [ cost of product goes up is the issue ] and can reach consumption market.

Anonymous said...

@Joachim Martillo said...

Pls read my views on the theory of yours.

http://secular-hindu.sulekha.com/blog/post/2009/04/isreal-trying-to-move-hindu-s-against-muslims.htm

Riaz Haq said...

"America’s economy is set to shift away from consumption and debt and towards exports and saving", says a story in the Economist magazine. Here are some excerpts:

STEVE HILTON remembers months of despair after the collapse of Lehman Brothers in 2008. Customers rushed to the sales offices of Meritage Homes, the property firm Mr Hilton runs, not to buy houses but to cancel contracts they had already signed. “I thought for a moment the world was coming to an end,” he recalls.

In the following months Mr Hilton stepped up efforts to save his company. He gave up options to buy thousands of lots that the firm had snapped up across Arizona, Florida, Nevada and California during the boom, taking massive losses. He eventually laid off three-quarters of its 2,300 employees. He also had its houses completely redesigned to cut construction cost almost in half: simpler roofs, standardised window sizes, fewer options. Gone were the 12-foot ceilings, sweeping staircases and granite countertops everyone wanted when money was free. Meritage is now catering to the only customers able to get credit: first-time buyers with federally guaranteed loans. It is clawing its way back to health as a leaner, humbler company.

The same could be said for America. Virtually every industry has shed jobs in the past two years, but those that cater mostly to consumers have suffered most. Employment in residential construction and carmaking is down by almost a third, in retailing and banking by 8%. As the economy recovers, some of those jobs will come back, but many of them will not, because this was no ordinary recession. The bubbly asset prices, ever easier credit and cheap oil that fuelled America’s age of consumerism are not about to return.

America’s economy will undergo one of its biggest transformations in decades. This macroeconomic shift from debt and consumption to saving and exports will bring microeconomic changes too: different lifestyles, and different jobs in different places. This special report will describe that transformation, and explain why it will be tricky.

The crisis and then the recession put an abrupt end to the old economic model. Despite a small rebound recently, house prices have fallen by 29% and share prices by a similar amount since their peak. Households’ wealth has shrunk by $12 trillion, or 18%, since 2007. As a share of disposable income it is back to its level in 1995. And if consumers feel less rich, they are less inclined to spend. Banks are also less willing to lend: they have tightened loan standards, with a push from regulators who now wish they had taken a dimmer view of exotic mortgages and lax lending during the boom.

Riaz Haq said...

Here is an interesting analysis by Eric Margolis of the consequenes of weak US economy:

One day, the king of ancient Babylon summoned his treasury overseer and exclaimed, “I need more money to wage war on those Hittite terrorists! “I looked in the great treasure chest and it’s nearly empty. There are hardly any gold coins left,” he thundered.
“Oh Light of the Euphrates,” groveled his terrified minister, “we are out of gold. Your wars have become too expensive.”

“But I have a solution, your celestial greatness. We will quietly trim the amount of gold in our imperial gold coins to make them go further. No one will notice.”

Fast forward to Washington, 2010. It’s no longer called “clipping coins.” Today, the name for debauching a nation’s currency is called “quantitative easing(QE),” but it’s still the same old fraud committed by financial flim-flam men.

Washington is flooding financial markets with $600 billion of worthless dollars, hoping a rising tide of Monopoly money will somehow lift America out of recession. The Fed’s first QE effort was a fizzle.

The US government is stoking worldwide inflation in order to lower its outstanding debt by repaying creditors with depreciated dollars. The rest of the world is boiling angry at Washington.

Just before last week’s G20 economic summit in South Korea, China’s state credit agency publicly downgraded America’s credit rating and questioned US leadership of the world’s economy.

In an unprecedented, stinging rebuke, China scolded Washington for “deteriorating debt repayment capability,” and predicted quantitative easing would lead to “fundamentally lowering the national solvency.”

Wow! This was a real slap in the face heard around the globe. China is the largest holder of US government debt. I remember the day when New York financiers used to sneer at iffy stock or bond issues as, “Chinese paper.” Now, it’s “American paper.” How the world has turned.

Washington has been blasting China for manipulating its currency to keep the value low – which is quite true. Embarrassingly, Germany and Brazil just accused the US of being as big a currency manipulator as China – which is also quite true.

A depreciated dollar boosts US exports and hurts nations exporting to the US. Economists call it, “beggar thy neighbor,” a destructive trade practice that played a key role in the 1930’s world depression.

This money flood is eroding the value of the dollar, the world’s premier medium of exchange. In the past two months, the US dollar has dropped 6% against other major currencies. Frightened investors are piling into gold, now up 17% in 60 days.

The Obama administration, just “shellacked” by voters in mid-term elections, and desperate to lower unemployment, is gambling more debt shock therapy will spark the economy back to life. But massive, unsustainable debt caused the US financial meltdown in 2008.....

Riaz Haq said...

China builds San Francisco Bay bridge, reports NY Times:

At a sprawling manufacturing complex here, hundreds of Chinese laborers are now completing work on the San Francisco-Oakland Bay Bridge.

Next month, the last four of more than two dozen giant steel modules — each with a roadbed segment about half the size of a football field — will be loaded onto a huge ship and transported 6,500 miles to Oakland. There, they will be assembled to fit into the eastern span of the new Bay Bridge.

The project is part of China’s continual move up the global economic value chain — from cheap toys to Apple iPads to commercial jetliners — as it aims to become the world’s civil engineer.

The assembly work in California, and the pouring of the concrete road surface, will be done by Americans. But construction of the bridge decks and the materials that went into them are a Made in China affair. California officials say the state saved hundreds of millions of dollars by turning to China.

“They’ve produced a pretty impressive bridge for us,” Tony Anziano, a program manager at the California Department of Transportation, said a few weeks ago. He was touring the 1.2-square-mile manufacturing site that the Chinese company created to do the bridge work. “Four years ago, there were just steel plates here and lots of orange groves.”

On the reputation of showcase projects like Beijing’s Olympic-size airport terminal and the mammoth hydroelectric Three Gorges Dam, Chinese companies have been hired to build copper mines in the Congo, high-speed rail lines in Brazil and huge apartment complexes in Saudi Arabia.

In New York City alone, Chinese companies have won contracts to help renovate the subway system, refurbish the Alexander Hamilton Bridge over the Harlem River and build a new Metro-North train platform near Yankee Stadium. As with the Bay Bridge, American union labor would carry out most of the work done on United States soil.

American steelworker unions have disparaged the Bay Bridge contract by accusing the state of California of sending good jobs overseas and settling for what they deride as poor-quality Chinese steel. Industry groups in the United States and other countries have raised questions about the safety and quality of Chinese workmanship on such projects. Indeed, China has had quality control problems ranging from tainted milk to poorly built schools.

But executives and officials who have awarded the various Chinese contracts say their audits have convinced them of the projects’ engineering integrity. And they note that with the full financial force of the Chinese government behind its infrastructure companies, the monumental scale of the work, and the prices bid, are hard for private industry elsewhere to beat.

The new Bay Bridge, expected to open to traffic in 2013, will replace a structure that has never been quite the same since the 1989 Bay Area earthquake. At $7.2 billion, it will be one of the most expensive structures ever built. But California officials estimate that they will save at least $400 million by having so much of the work done in China. (California issued bonds to finance the project, and will look to recoup the cost through tolls.)

California authorities say they had little choice but to rebuild major sections of the bridge, despite repairs made after the earthquake caused a section of the eastern span to collapse onto the lower deck. Seismic safety testing persuaded the state that much of the bridge needed to be overhauled and made more quake-resistant.

Riaz Haq said...

China has showered goodies on Pakistan as its top diplomat Dai Bingguo is visiting Islamabad, complains Times of India.

China has offered Pakistani companies tax free status if they operate in the border province of Xinjiang while ICBC, the Chinese bank, is working on ways to finance the Iran-Pakistan oil pipeline project.

In Islamabad, Dai appealed to world powers to support Pakistan and not desert it at this time. Pakistan has considerable influence on Afghanistan, which must be taken into consideration by those trying to resolve the crisis in Kabul, he suggested after meeting Pakistani president Asif Ali Zardari and prime minister Yousuf Raza Gilani.

The taxation move suggests China is serious about building a rail line connecting Pakistan and is preparing the economic infrastructure to support it. The new rule unveiled on Saturday offers a 5-year tax exemption to companies operating in Kashgar, which borders Pakistan and Horgos on the Chinese border with Kazakhstan.

Beijing had earlier announced to build a logistics centre in Kashgar, which saw bloody ethnic riots earlier this year, to revive the local economy and divert attention of the minority Muslim community from separatist leaders fighting to build an independent East Turkmenistan nation.

Pakistan recently announced that the Industrial and Commercial Bank of China, the largest of Chinese banks, has been appointed as the main financier in a consortium that will finance the $1.2 billion Iran-Pakistan gas pipeline. Beijing's hand is clearly visible in the decision because the project is based on the assumption of a politically stable Pakistan, which is not the case at present.

China, which has already invested $200 million to build the Gadwar port in Pakistan and helped the country build two nuclear power projects, is betting on the ability of the Zardari government to ensure stability by mending fences with the country's military leadership.


http://timesofindia.indiatimes.com/world/china/China-offers-goodies-to-Pakistan-urges-world-powers-not-to-abandon-her/articleshow/11233118.cms

Riaz Haq said...

China signs 6 agreements with Pak, according to Business Recorder:

Pakistan and China on Friday signed six bilateral agreements including a Currency Swap Agreement to further bolster their existing trade and economic co-operation.

The agreements worth over US $700 million were signed between the two sides at a ceremony held here at the PM House and was also witnessed by Prime Minister Syed Yusuf Raza Gilani and State Councillor of China Dai Bingguo.

The Supplementary Agreement on Extension of Five Year Development Programme on Trade and Economic Co-operation between the two countries was signed by Secretary Economic Affairs Division, Wajid Rana and Vice Minister of the Chinese Ministry of Commerce, Li Jinzao on behalf of their respective governments.

The Inter-Governmental Framework Agreement on Additional Financing for Improvement of KKH ($90 million) between the two countries was also signed by Wajid Rana and Li Jinzao.

The Currency Swap Agreement was signed by Governor State Bank of Pakistan, Yaseen Anwar and Vice Governor of the People's Bank of China, Du Jinfu.

The Concessional Loan Agreement on Additional Financing for Improvement of KKH ($90 million) between the Economic Affairs Division (EAD) and the Export-Import Bank (EXIM Bank) of China was signed by Secretary EAD, Wajid Rana and the Vice Governor of EXIM Bank, Sun Ping.

The Loan Agreement on Provision of $259 million Preferential Buyer's Credit for KKH (Karakorum Highway) Realignment at Attabad between EAD and the EXIM Bank of China was also signed by Wajid Rana and Sun Ping.

The Loan Agreement on Export Credit Facility of $464 million for Power Plant between Guddu Power Company and EXIM Bank of China was signed by CEO Central Power Generation Company Limited (GENCO- II), Aslam Sheikh and the Vice Governor of China's EXIM Bank, Sun Ping.


http://www.brecorder.com/business-a-economy/single/672/189/1264324/

Riaz Haq said...

Chinese banks bailing out Indian company, according to the Wall Street Journal:

Reliance Communications Ltd. opened a window this week. India's second-largest mobile phone carrier by number of subscribers was under pressure to refinance $1.18 billion of foreign-currency convertible bonds. In the current market, that looked like a stiff challenge, as lenders in the U.S. and Europe struggle with their deteriorating economies.

Enter a consortium of Chinese banks to bail out the Indian company with a loan paying just 5%. The deal gives the banks the sort of exposure to India's fast-growing communications space that Chinese companies couldn't get otherwise. New Delhi routinely blocks Chinese business seeking a piece of India's strategic industries such as telecommunications, technology or energy. The government typically cites quality-control issues or national security, though political posturing is perhaps a more likely cause.

Yet the Reliance loan deal puts the Chinese banks in a strong position over a prominent Indian business. It might also help China Inc. get more leverage in the Indian economy.

Still, politics shouldn't cloud the positives for India. The deal is a savior for Reliance, whose share price is nearly 87% below the conversion price set on the bonds four years ago. Moreover, the loan means China, through its state-owned banks, now has a significant stake in the success of an Indian telecommunications giant.

Beyond Reliance, a host of Indian companies are in need of capital this year to fulfill expansion plans or repay debt. But traditional funding channels are drying up, local markets are jittery and interest rates are by no means cheap. Under those circumstances, more Chinese money may find a warm welcome in India.


http://online.wsj.com/article/SB10001424052970204468004577168443270938430.html?mod=topix

Riaz Haq said...

Here's Daily Times on China's Gwadar plans:

ISLAMABAD: Chinese investment in the Gwadar Port is purely economic, said Hu Xijin Editor-in-Chief of the Global Times on Wednesday. Speaking at a roundtable organised by the Institute of Regional Studies (IRS) on Pak-China relations with the editorial staff of Global Times he siad China would make all the necessary investments in the Port to make it fully operational to support Chinese trade with West Asia, especially the trade between western part of China and that part of the world. China considers Pakistan an important friendly neighboring country and Chinese investors want to invest in projects in Pakistan. Some Chinese investors are apprehensive about the security situation in Pakistan. He said China would keep supporting the reconstruction of Afghanistan post-2014. China does not want to undertake projects in any country that are opposed by the host communities. Responding to a question about the imbalance in trade of China with Pakistan, Hu said China was a free market economy where the government could not dictate to the companies to import products from other countries if they were not market competitive. Ashraf Azim President of IRS pointed out Indian concerns about the use of Gwadar Port, as a naval base was completely baseless.

http://www.dailytimes.com.pk/default.asp?page=2013\02\21\story_21-2-2013_pg5_13

Riaz Haq said...

Here's a PakObserver report on Chinese investment in Pakistan:

Friday, March 29, 2013 - Islamabad—China is committed to invest heavily in Pakistan’s energy and other sectors to improve lives of people, Deputy Chief of Mission of the Chinese Embassy Yao Wen said Thursday.

Speaking at a function at a local school here, Yao Wen said Chinese are already working on 120 projects in Pakistan with around a quarter related to energy.

In addition, during the last five years volume of bilateral trade has grown by 70 per cent to over $ 12 billion with Pakistani exports increased two-fold from $1 billion to $2.2 billion, he informed.

Yao Wen stressed the need for enhancing collaboration between educational institutions and exchanges of students and researchers to promote intellectual cooperation.

Lauding the role of Pakistan in regional and global peace, stability and development, he said that Pakistan has offered great sacrifices to ensure peace.

Speaking on the occasion, President Ex-Chinese Association Raza Khan lauded the Chinese assistance and cooperation in various fields, terming it a great service to people of Pakistan.

He lauded the active involvement of Chinese Ambassador Liu Jian in capacity building of students and said that supporting needy students was a great service for social development. Raza Khan stressed the need for increasing people-to-people exchanges to promote understanding and carry forward cause of Pak-China friendship.

Terming China a sincere friend, Joint Secretary Ministry of Education Prof. Muhammad Rafiq Tahir said that two countries should fully unleash their potential of cooperation to benefit masses.


http://pakobserver.net/detailnews.asp?id=202003

Riaz Haq said...

From Wall Street Journal:

ISLAMABAD—Pakistan plans to sign deals worth billions of dollars with China for development of infrastructure and energy projects during Prime Minister Nawaz Sharif ’s visit to Beijing this weekend, Pakistani officials said.

Mr. Sharif is to meet the Chinese leadership on the sidelines of the Asia-Pacific Economic Cooperation summit, which starts in Beijing this week. Pakistan suffers from a crippling shortage of electricity and it is looking to its close ally China for a solution.

The agreements are part of a bigger aim to establish a Pakistan-China economic corridor that will link south west China, by road and rail, to the Pakistani port of Gwadar, giving China a harbor close to the Middle East, a $35 billion program in total.

“Pakistan and China have strong relations and we’ve now decided to take this relationship to the next level of strategic economic cooperation,” Ahsan Iqbal, Pakistan’s Planning Minister, said in an interview.

Mr. Iqbal said the Pakistani side’s focus in Beijing will be on energy, with agreements or memorandums to be signed on a series of specific power projects. He said that previously, negotiations had been over the broad framework for the proposed economic corridor.

“The Chinese have agreed to invest at a critical time, when Pakistan is really starved of energy,” said Mr. Iqbal.

Mr. Sharif will sign agreements on 14 power plants, that will provide the country with 10,400 Megawatts of new generation, said Musadiq Malik, the spokesman for the prime minister. The Chinese companies will invest in building the power stations as commercial ventures, raising their own financing, as foreign direct investment, so Pakistan won't be taking on any additional debt, Mr. Malik said.

Another official said that two of the power plant projects are sufficiently developed to begin work on the ground within the next 12 months. The plants are mostly coal-fired.

Building power stations on that scale would cost at least $10 billion, experts said. Pakistan will also need to upgrade its electricity transmission network and build facilities to import and transport the huge quantities of coal that would be required.

Pakistan’s daily electricity output is generally 13,000 MW to 15,000 MW, leaving it at least 5,000 MW short of demand. That deficit means hours of rolling supply cuts to homes and businesses every day across the country, a situation that economists estimate slashes several percentage points off national income.

Aside from China, Pakistan has struggled to attract other foreign investors to its energy sector. Pakistan’s current generation is based on oil-fired stations, which are expensive to run, and gas-power plants that are stymied by a shortage of gas in the country. Pakistan now plans to build plants that use coal, along with limited solar and wind power projects, officials said.

“We have received a signal from the Chinese that these [power] projects are ready to proceed,” Mr. Sharif told a cabinet meeting Thursday, in televised remarks. “These power stations will start to be built, but to complete them it will take about 3½ years.”

http://online.wsj.com/articles/pakistans-sharif-heading-to-beijing-to-sign-energy-infrastructure-pacts-1415293363