China a “White Knight” in Shining Armour for the U.S
By Thomas Wilkins 12 October 2008
China is expected to play a major role in the U.S. financial crisis. The reasons are transparent and only require logic to see. (1) China has large foreign currency reserves, (2) The Emergency Economic Stabilization Act of 2008 (EESA) just signed into law by President Bush will constraint financial policy options for the U.S. since $700 billion of new cash is needed to launch the program, (3) Since the U.S. economy will likely face a forthcoming recession, these funds will not be coming to Washington as taxes but as debt borrowing by the U.S. Treasury. (4) Whoever wins the White House in the November U.S. election will have to address the time-tested rule that “He who has the cash makes the rules.” (5) The borrowing by the U.S. for EESA programs will constrain the new U.S. president in January and force him to deal with the demands for cash inflows to Washington. (6) Due to U.S. Secretary of Treasury Paulson’s numerous travels to China, his significant Chief Executive Officer experience in Wall Street and his chairing the U.S. side of the U.S.-China Strategic Economic Dialogue, it is reasonable to expect him to reach for bilateral and multilateral plans with China.
This is the first of two article which will address the following questions: (1) What does Wall Street people expect the role China can play in helping the U.S. cope with the financial crisis? (2), What Wall Street people expect China to contribute to the world economic and financial stability? (3) Do some American people really believe that China and other Asian countries’ liquidity helped cause the crisis?
At the moment, Wall Street is focused on its own internal problems and little opinion has recently been verbalized about China. The investment by China Investment Corp (CIC) in the June 2007 IPO of Blackstone, a New York-based private equity firm, has gone down in value. This set back must have tempered some positive feeling in Beijing. The same can be said about the $5 billion investment by CIC in Morgan Stanley. Morgan Stanley’s stock has fallen from $73 per share in late 2007 to under $10 per share during Wall Street’s worst week in the financial world’s history. Both of these negative experiences must have reinforced risk aversion feelings in Beijing. Surely, many in Beijing will argue that China should abandon its export oriented thrust and shift to a consumer demand economy. Resistance to more U.S. investing is therefore expected in China.
Resistance to linking up with China can also be expected inside the U.S. Jason Furman is an example of how Obama is expected to accept China’s role in a crisis solution. Obama’s campaign has named Furman as Director of Economic Policy who is one of Wal-Mart’s strongest defenders. During the campaign, Obama blasted Senator Clinton for sitting on the Wal-Wart board of directors and pledged: “I won’t shop there.” However, the constraining forces caused by the cash flow demands of $700 billion needs for EESA programs will surely present Furman an opportunity to convince Obama of the urge need to accept China’s significant potentiality.
Kenneth Rogoff, economist at Harvard University and formerly the chief economist at the IMF and now an economic adviser to Senator John McCain, has expressed the following opinion about China. “The real problem is that China’s authoritarian system faces little opposition when it decides to bulldoze a shantytown that stands in the way of a new airport. So, is the idea that India’s economy could overtake China’s hopeless romanticism? Not necessarily, if only because the areas where India excels, notably services, have far higher potential margins than manufacturing. Here, the Chinese, hampered by a vastly inferior legal system, will not be able to compete easily. Western companies are far more inclined to trust Indian firms with sensitive financial information or patents than they are in the case of China. Foreign companies know that if they outsource any high-tech process to China, they might as well publish their blueprints on the Internet.”
In one respect, China is a beneficiary of a deflationary world view, preached for years by Stephen Roach, formerly Chief Economist of Morgan Stanley for 16 years and now Chairman of Morgan Stanley’s Asia operation. Sitting on its liquid assets is a strong argument during deflationary times as seen with the dot com bubble, the housing bust, then a run on the banks and now the run on equities, worldwide. More deflation is at risk according to Nouriel Roubini, Professor of Economics at the New York University Stern School of Business. He foresees a severe risk of a global system financial meltdown. Surely strong arguments will be heard in Beijing to sit this crisis out.
Who then can persuade against the arguments of Chinese financial isolation? Henry Paulson got his knees when pleading with Speaker of the U.S. House of Representatives, Nancy Pelosi to accept EESA. Secretary Paulson has negotiating skills. If any person can close on a deal where China is a “white knight” in shining armour surely that person is Henry Paulson, the “George Washington” of the 21st century.
Thomas H. Wilkins, CFA is chief executive manager of Joseph Jekyll Advisers LLC in Athens, Georgia, USA.
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China a “White Knight” in Shining Armour for the U.S
By Thomas Wilkins
12 October 2008
China is expected to play a major role in the U.S. financial crisis. The reasons are transparent and only require logic to see. (1) China has large foreign currency reserves, (2) The Emergency Economic Stabilization Act of 2008 (EESA) just signed into law by President Bush will constraint financial policy options for the U.S. since $700 billion of new cash is needed to launch the program, (3) Since the U.S. economy will likely face a forthcoming recession, these funds will not be coming to Washington as taxes but as debt borrowing by the U.S. Treasury. (4) Whoever wins the White House in the November U.S. election will have to address the time-tested rule that “He who has the cash makes the rules.” (5) The borrowing by the U.S. for EESA programs will constrain the new U.S. president in January and force him to deal with the demands for cash inflows to Washington. (6) Due to U.S. Secretary of Treasury Paulson’s numerous travels to China, his significant Chief Executive Officer experience in Wall Street and his chairing the U.S. side of the U.S.-China Strategic Economic Dialogue, it is reasonable to expect him to reach for bilateral and multilateral plans with China.
This is the first of two article which will address the following questions: (1) What does Wall Street people expect the role China can play in helping the U.S. cope with the financial crisis? (2), What Wall Street people expect China to contribute to the world economic and financial stability? (3) Do some American people really believe that China and other Asian countries’ liquidity helped cause the crisis?
At the moment, Wall Street is focused on its own internal problems and little opinion has recently been verbalized about China. The investment by China Investment Corp (CIC) in the June 2007 IPO of Blackstone, a New York-based private equity firm, has gone down in value. This set back must have tempered some positive feeling in Beijing. The same can be said about the $5 billion investment by CIC in Morgan Stanley. Morgan Stanley’s stock has fallen from $73 per share in late 2007 to under $10 per share during Wall Street’s worst week in the financial world’s history. Both of these negative experiences must have reinforced risk aversion feelings in Beijing. Surely, many in Beijing will argue that China should abandon its export oriented thrust and shift to a consumer demand economy. Resistance to more U.S. investing is therefore expected in China.
Resistance to linking up with China can also be expected inside the U.S. Jason Furman is an example of how Obama is expected to accept China’s role in a crisis solution. Obama’s campaign has named Furman as Director of Economic Policy who is one of Wal-Mart’s strongest defenders. During the campaign, Obama blasted Senator Clinton for sitting on the Wal-Wart board of directors and pledged: “I won’t shop there.” However, the constraining forces caused by the cash flow demands of $700 billion needs for EESA programs will surely present Furman an opportunity to convince Obama of the urge need to accept China’s significant potentiality.
Kenneth Rogoff, economist at Harvard University and formerly the chief economist at the IMF and now an economic adviser to Senator John McCain, has expressed the following opinion about China. “The real problem is that China’s authoritarian system faces little opposition when it decides to bulldoze a shantytown that stands in the way of a new airport. So, is the idea that India’s economy could overtake China’s hopeless romanticism? Not necessarily, if only because the areas where India excels, notably services, have far higher potential margins than manufacturing. Here, the Chinese, hampered by a vastly inferior legal system, will not be able to compete easily. Western companies are far more inclined to trust Indian firms with sensitive financial information or patents than they are in the case of China. Foreign companies know that if they outsource any high-tech process to China, they might as well publish their blueprints on the Internet.”
In one respect, China is a beneficiary of a deflationary world view, preached for years by Stephen Roach, formerly Chief Economist of Morgan Stanley for 16 years and now Chairman of Morgan Stanley’s Asia operation. Sitting on its liquid assets is a strong argument during deflationary times as seen with the dot com bubble, the housing bust, then a run on the banks and now the run on equities, worldwide. More deflation is at risk according to Nouriel Roubini, Professor of Economics at the New York University Stern School of Business. He foresees a severe risk of a global system financial meltdown. Surely strong arguments will be heard in Beijing to sit this crisis out.
Who then can persuade against the arguments of Chinese financial isolation? Henry Paulson got his knees when pleading with Speaker of the U.S. House of Representatives, Nancy Pelosi to accept EESA. Secretary Paulson has negotiating skills. If any person can close on a deal where China is a “white knight” in shining armour surely that person is Henry Paulson, the “George Washington” of the 21st century.
Thomas H. Wilkins, CFA is chief executive manager of Joseph Jekyll Advisers LLC in Athens, Georgia, USA.
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