Ben Simpfendorfer, “Chinese exports could crush fragile markets”

Copyright The Financial Times Limited 2009

Keith Bradsheras, “China Stirs Economy, Some See Protectionism”

As China Stirs Economy, Some See Protectionism, New York Times

Keith Bradsheras

Published: June 23, 2009

HONG KONG — China has begun a concerted effort to keep its export economy humming, even as demand for its goods has plummeted with the global downturn.

Risking the ire of the United States and other trading partners, the Chinese government has quietly started adopting policies aimed at encouraging exports while curbing imports, even though China, as one of the world’s largest exporters, has aggressively criticized protectionism in other countries.

The government has sharply expanded three programs to help exporters, giving them larger tax rebates, more generous loans from state-owned banks to finance trade, and more government-paid travel to promote themselves at trade shows around the world.

At the same time, Beijing has banned all local, provincial and national government agencies from buying imported goods except in cases where no local substitute exists.

The rule, issued as part of the country’s economic stimulus plan and enforcing a seldom honored Chinese law from 2003 favoring domestic suppliers, exploits China’s failure so far to sign a global agreement barring protectionism in government procurement.

And in an effort to strengthen its own exporters, it is limiting how much of certain key raw materials can leave the country.

Ron Kirk, the United States trade representative, announced on Tuesday that the United States and the European Union had filed a complaint with the World Trade Organization accusing China of limiting exports like bauxite and zinc, of which China is one of the world’s largest producers, to give an unfair advantage to Chinese manufacturers that use the materials.

China denied Wednesday that it had broken W.T.O. rules in the dispute, but the issue is likely to feed criticism of China.“China is not only continuing but accelerating many of the protectionist approaches they’ve taken in the past to promote economic development,” said Michael R. Wessel, who was appointed by Nancy Pelosi, the speaker of the House, to the United States-China Economic and Security Review Commission.

The policies could help ensure that China’s economy continues to grow, but at the risk of increasing global trade tensions at a sensitive time when more countries are resorting to administrative measures to restrict trade and the W.T.O. has warned against protectionism.

The policies also fly in the face of China’s own promises and incentives to build an economy based on domestic consumption as well as international exports.

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Judy Shelton, “Congress and the IMF’s Power Grab”

Congress and the IMF’s Power Grab, Wall Street Journal

Judy Shelton, June 19, 2009

A sad spectacle played out in Washington this week as House Democrats pushed through a $106 billion supplemental appropriations bill to fund our troops in Iraq and Afghanistan that also provides a whopping $108 billion in expanded credit to the International Monetary Fund (IMF). The bill, which will soon be voted on in the Senate, also permits the IMF to sell $13 billion in gold for the chief purpose of establishing a permanent endowment for itself.

The Obama administration went to great lengths to get the IMF its billions. Last week, congressional leaders received a letter that made a firm connection between global economics and global security. “We know from the 1930s that a protracted global economic slump can foster undesirable and unforeseeable reactions to hardship and adversity,” it stated. “Financial hardship and poverty breed desperation, which helps terrorist networks to attract new recruits with messages of hate, violence and intolerance.”

The letter then urged Republicans and Democrats to support the president’s request for IMF funding. “We believe that the current instability poses a significant risk to the long-term prosperity and security of the United States.” It was signed by Secretary of State Hillary Clinton, National Security Adviser James Jones, and, most notably, Secretary of Defense Robert Gates.

Whoa! Clearly the implication was that a vote against the IMF funds would be a vote against national security. But does such a claim make sense? To answer that we must first seriously consider: 1) the impact of international financial instability on global security, and 2) whether the IMF is a force for good in establishing a stable financial foundation for economic prosperity.

The era of the 1930s is invoked often these days, usually to compare today’s economic recession with the Great Depression years triggered by the U.S. stock market crash on Oct. 29, 1929. The international impact was exacerbated as countries grew protectionist and turned inward, erecting tariff barriers against imported goods and engaging in competitive currency devaluations. Monetary nationalism and the breakdown of international trade worsened the downward global economic spiral, paving the way for Adolf Hitler to come to power in hard-hit Germany and leading to World War II.

Certainly, it was recognition of the damaging economic impact of currency chaos and its worrisome political implications that drove U.S. Treasury Secretary Henry Morgenthau to ask his deputy, Harry Dexter White, to begin devising a plan for coordinated monetary arrangements among the U.S. and its allies. It was Dec. 14, 1941, one week after the attack on Pearl Harbor. The goal was to lay the groundwork for a more hopeful future for the Allied nations. Instead of returning to the beggar-thy-neighbor policies of the 1930s, they could look forward to a stable postwar international monetary system that would provide a foundation on which to rebuild their economies and attain new levels of prosperity.

Ultimately, the plan was developed into the Bretton Woods agreement of 1944 — which established the IMF to operate a gold-exchange standard. White had decided early on that maintaining stable exchange rates was a separate task from providing cheap loans to Allied countries. A different organization — the International Bank for Reconstruction and Development (later called the World Bank) — was designated to perform that function.

The IMF carried out its exchange-rate duties for the next quarter century, permitting foreign central banks to redeem excess dollars at the fixed conversion rate of $35 per ounce of gold. The period from 1947 to 1967, known as the “Bretton Woods era,” marked the emergence of a new world economic order based on solid money and increasingly free competition in the international marketplace.

The system came under pressure in the late 1960s as the U.S. began to inflate its money supply to accommodate growing fiscal strains. A liberal agenda of increased spending for social programs coincided with an escalation of the Vietnam War. The U.S government borrowed money to pay for it all, forcing other nations to absorb some of the inflationary impact through their own fixed-exchange rates with the dollar.

The Bretton Woods system ended on Aug. 15, 1971, when President Richard Nixon “closed the gold window” — i.e., denied the convertibility privilege and thus delinked the dollar from gold. Since then, in the absence of a monetary anchor, exchange rates have been left to “float.” Today, the dollar’s residual role as key global reserve currency reflects the waning credibility of the U.S. government in carrying out responsible fiscal and monetary policies. Which is why China, Russia, Brazil and other developing nations are now calling for a new global reserve currency to provide an alternative to the dollar. And why the IMF funding provision in the current wartime supplemental bill needs to be closely examined.

Officials concerned about global security are right to recognize that financial instability breeds discontent and fosters social resentment that can challenge ruling interests and topple whole regimes. The question is whether short-term fixes — in the form of emergency loans to a flailing government, the sort of assistance the IMF is prepared to offer — provide a solid foundation for economic growth.

Just as overdone fiscal “stimulus” undermines confidence in future prosperity due to its inflationary consequences, it makes no sense to throw money at struggling nations without providing the hope of a more permanent solution that will enable them to meaningfully participate in the global marketplace. Money meltdown occurs when governments face overwhelming gaps between revenues and expenditures; foreign investors abandon the currencies as they race to the exits, leaving bereft citizens with worthless paper.

Putting out financial fires has become the specialty of the IMF, and the temporary respite offered through emergency loans may mitigate immediate damage to certain vulnerable countries, especially those exposed to contagion from neighbors. But the IMF is not capable of fulfilling its original mandate to oversee a stable international monetary system because there is no international monetary system. And the IMF’s desire to sell gold to obtain windfall profits to fund its own permanent endowment was never envisioned under the Bretton Woods Articles of Agreement.

That agreement offered the countries fighting World War II the prospect of a more stable world. All the IMF is offering our dangerous world is the prospect of lurching from one short-term economic fix to the next.

Ms. Shelton, an economist, is author of “Money Meltdown: Restoring Order to the Global Currency System” (Free Press, 1994).

Printed in The Wall Street Journal, page A11

http://online.wsj.com/article/SB124528391365825649.html

Peter Morici, “Recalibrating U.S.-China”

June 11, 2009

The United States now confronts its greatest economic challenges since the Great Depression. In addition to resolving crises in financial and housing markets, trade deficits with China and on oil must be addressed for the U.S. economy to achieve robust growth.

Fixing credit markets and energy policy are largely domestic challenges, whereas recalibrating trade with China requires cooperation from Beijing. However, such cooperation requires fundamental changes in Chinese industrial policies and a departure from maintaining an undervalued yuan to spur industrial development.

Chinese Industrial and Currency Policies

Since the late 1970s, China has transformed from a centrally-planned economy dominated by state enterprises to a public-private economy highly responsive to global market opportunities.

China has accomplished dramatic growth and modernization by empowering town and village enterprises, private businesses and foreign-invested enterprises, and delegating smaller, though still significant, roles to national state-owned enterprises. Exports are critical to this strategy.

In addition to exploiting comparative advantages in labor-intensive manufacturing, China has applied industrial policies and regulation on foreign investment to ensure the rapid development of priority industries where it may lack the resources, technology and a comparative advantage.

For example, China lacks adequate metallic resources to produce large amounts of steel competitively, and modern capital equipment and technology were initially purchased on global markets. Yet, China exports steel even when transportation costs to destination markets are greater than total labor costs in those markets. Similarly, China should be importing many more automobiles to meet its requirements, but Beijing encourages foreign automakers to assemble cars and source parts in China, and to transfer technology to indigenous firms.

China maintains an undervalued yuan that makes exports cheaper in foreign markets and imports more expensive at home.  The Chinese government persistently purchases dollars and other currencies with yuan to suppress its value, rather than permitting market forces to determine its value. It converts those purchases into U.S. Treasury securities and foreign assets.

In 2008, Chinese monetary authorities purchased more than $400 billion in U.S. and other foreign currencies-this was about 10 percent of China’s GDP and 25 percent of its exports. China holds about $2 trillion in foreign exchange reserves, mostly in U.S. securities.

Undervaluation subsidizes exports and protects domestic industries from import competition, and contributes importantly to trade deficits in the United States and other countries. The Chinese people consume 10 percent less than they produce to finance China’s large trade surpluses and production that exceeds consumption in the United States and elsewhere.

The rapid pace of modernization and productivity growth in China should rapidly drive up the dollar value of the yuan; however, in 1995, the Chinese government pegged the yuan at 8.28 per dollar.

In July 2005, China adjusted this peg to 8.11 and announced the yuan would be aligned to a basket of currencies. Subsequently, the yuan still tracked the dollar quite closely, falling slowly to 6.83 it July 2008. Since, the yuan has fluctuated closely around that value-essentially, China has repegged the yuan.

From 1995 to 2008, the annual U.S. trade deficit with China grew from $34 to $266 billion, accounting for virtually all of the increase in the U.S. non-oil deficit from $44 to $282 billon.

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Keith Bradsher, “China’s Commodity Buying Spree”

China’s Commodity Buying Spree, New York Times

HONG KONG — Strong buying by China has helped lift commodity prices around the world this spring, but growing evidence suggests that a sizable portion of this buying has been to build stockpiles in China, and may not be sustainable.

At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak.

Commodities and shipping executives describe Chinese stockpiling in recent months of a range of other commodities as well, including aluminum, copper, nickel, tin, zinc, canola and soybeans. Starting in April, China began stockpiling significant quantities of crude oil.

China’s goals vary by commodity. Chinese companies have bought iron ore heavily on the spot market in anticipation of higher prices in annual contract talks now nearing completion. The Chinese government has been stockpiling oil and some metals for strategic reasons, and bought huge quantities of aluminum and canola to insulate domestic producers of these goods from falling global prices over the winter.

“There has been enormous stockpiling of all commodities” by China, and this cannot continue indefinitely, said Tim Huxley, the chief executive of Wah Kwong Maritime Transport Holdings, a big shipping line based here.

Those extra purchases beyond China’s daily needs have helped reverse the price collapse in commodities that followed the economic downturn, but could also limit the scale of the rebound.

Moody’s Investors Service announced on Wednesday that it was putting a negative outlook on the base metals, mining and steel industries in Asia and the Pacific, having previously done so for these sectors elsewhere.

“China’s strategic stockpiling and replacement of lower-quality domestic production with higher-quality imports have supported the recent rally in prices for many base metals, but we will not see a sustainable turnaround in demand until the major economies of the U.S., Europe, and Japan recover,” said Terry Fanous, a senior vice president in Sydney for Moody’s, adding that the leading economies were not likely to recover until next year.

In the latest sign of weak overseas demand, the Chinese government announced on Thursday morning that the country’s exports fell 26.4 percent in May from a year earlier. Imports were down 25.2 percent from a fairly weak level a year ago, as China’s overall trade surplus continued to narrow, to $13.39 billion.

The Standard & Poor’s GSCI, an index of global commodity prices, has risen 42 percent from its low on Feb. 18, but is still less than half its record, set on July 3.

One of the best leading indicators of international trade in commodities is the Baltic Exchange Dry Index, which measures the daily cost of chartering a large freighter. While the GSCI has continued to rise in the last week, the freight index has fallen by a fifth in that period.

Richard S. Elman, the chief executive of the Noble Group, Asia’s largest diversified commodities trading company, bounced up from the conference table in his office here when asked about freight rates during an interview on Tuesday morning. He walked over to his desk, dominated by three computer screens that partly obscure a perfect view of Hong Kong’s harbor, and quickly punched up on one screen a list of daily charter rates for large bulk carrier freighters.

The list showed ship owners charging $58,000 a day now but just $24,000 a day for charters next year or in 2011 — an indication that there will be more ships than cargoes in the years ahead, particularly with shipyards still finishing vessels ordered during the recent boom.

Pointing to the rates for the next two years, he said, “That’s the real market” for ships.

From an immense new sugar mill in Brazil to an extensive coking coal operation in Australia, Noble is active in commodities around the globe, and its stock has nearly quadrupled since its low on Oct. 24. Mr. Elman voiced optimism about the future of the Chinese economy and of worldwide demand for commodities, but cautioned that for some commodities, “the futures prices have gone ahead” of the prices for physical delivery.

According to J.P. Morgan, China’s iron ore imports were 33 percent higher in April than a year earlier. Crude oil imports were up nearly 14 percent, aluminum oxide imports climbed 16 percent and refined copper imports jumped 148 percent.

Imports of coal soared 168 percent as Chinese utilities bought more foreign coal while trying to negotiate better prices with domestic producers.

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Charles Blum, “Speaking Softly And…”

“Speaking Softly And…”

Charles Blum, June 10, 2009

Treasury Secretary Tim Geithner’s speech at Peking University last week seems to have been better received there than in Washington.   Some currency hawks are lamenting that he saw the need to go to apologize (again) for stating the obvious fact that China has been manipulating its currency for a long time now.

In fact, the speech does not include any apology (though private conversations with official Chinese might have).  Nor did it represent what some in the media portrayed as a backtracking from the Obama campaign’s tough line on China.  On the contrary, it is a thoughtful, reasoned explanation for the need for China and the US to work closely together to “lay the foundations for more balanced, sustained growth of the global economy once this recovery is firmly established.”  The speech should be studied carefully, in my view.  The text can be found at http://blogs.wsj.com/chinajournal/2009/06/01/full-text-of-geithners-speech-at-peking-university/.

In fact, I found a lot to admire and agree with in this speech.  For example:

•    It rests quite clearly on the expectation that Beijing will start to assume responsibility for the health of the global economy.
•    Geithner made clear that sustainable growth in China “will require a substantial shift from external to domestic demand, from investment and export driven growth, to growth led by consumption.”
•    At the same time, the US will have to increase its savings (i.e. reduce the rate of consumption growth) and should be expected to reduce its current account deficit (the broad measure of borrowing from abroad) as the recovery proceeds.
•    Its global perspective:  “China and the United States individually, and together, are so important in the global economy that what we do has a direct impact on the stability and strength of the international economic system.  Other nations have a legitimate interest in our policies and the ways in which we work together, and we each have an obligation to ensure that our policies and actions promote the health and stability of the global economy and financial system.”

With respect to the value of the renminbi – a major nexus between Chinese and American growth strategies – Geithner called for a “more flexible exchange rate regime.”   There’s not much new in this.  Since the days of John Snow, Treasury has used that phrase as code for a stronger RMB.  Indeed, only that meaning makes Geithner’s key sentence other than nonsense.  He said:  “Greater exchange flexibility will help reinforce the shift in the composition of [Chinese] growth, encourage resource shifts to support domestic demand, and provide greater ability for monetary policy to achieve sustained growth with low inflation in the future.”  That had to refer to a stronger RMB, not one subject to greater fluctuations.

So, unlike some others. I see in Geithner’s speech most of the elements of a sensible approach to the vexatious currency problem.  He has lowered his voice, especially compared to Henry Paulson’s histrionics.  He has placed the central issues – sustainable growth strategies for China and the US – on the table for the Strategic and Economic Dialog.  He did not back down on the need for a substantial revaluation of the RMB as crucial to a sustainable global recovery.

He’s speaking wisely and more softly.  To make the Rooseveltian strategy complete, all he needs is a big stick, some means of compelling Beijing to make politically hard decisions.   John Snow at one point told a business delegation in his office that they “should hold our feet to the fire so we can hold the Chinese feet to the fire.”  That, I believe, is the most important function of the Currency Reform for Fair Trade Act of 2009 (H.R 2378 and S. 1027).  Let’s hope the Secretary will prove willing and able to use it.

Martin Wolf, “It is in Beijing’s interests to lend Geithner a hand”

It is in Beijing’s interests to lend Geithner a hand, Financial Times

By Martin Wolf

Published: June 9 2009 19:06 | Last updated: June 9 2009 22:52

Creditor countries are worrying about the safety of their money. That is what links two of the big economic stories of last week: Chancellor Angela Merkel’s attack on the monetary policies pursued by central banks, including her own, the European Central Bank; and the pressure on Tim Geithner, US Treasury secretary, to persuade his hosts in Beijing that their claims on his government are safe. But are they? The answer is: only if the creditor countries facilitate adjustment in the global balance of payments. Debtor countries will either export their way out of this crisis or be driven towards some sort of default. Creditors have to choose which.

Germany and China have much in common: they have the world’s two biggest current account surpluses, at $235bn and $440bn, respectively, in 2008; and both are also powerhouses of manufactured exports. They have, as a result, suffered from the collapse in demand of overindebted purchasers of their exports. So both feel badly done by. Why, they ask themselves, should their virtuous people suffer because their customers have let themselves go so broke?

Germany and China are also very different: Germany is a highly competitive global producer of manufactures. But it is also a regional power that has shared its money with its neighbours since 1999. Its problem is that its surpluses were offset by its neighbours’ largely private excess spending. Now that the borrowers are bankrupt, their countries’ domestic demand is collapsing. This is leading to a huge expansion in fiscal deficits and pressure for easier monetary policies from the ECB. So Ms Merkel is driven towards undermining the independence of Germany’s central bank, in order to protect the still more vital goal of monetary stability.

Germany may be Europe’s pivotal economy. But China is a nascent superpower. Without intending to do so, it has already shaken the world economy. Incorporating this dynamic colossus into the world economy involves huge adjustments. This is already evident in any discussion of a sustained exit from the crisis.

A recent paper from Goldman Sachs – unfortunately, not publicly available – sheds fascinating light on the impact of China’s rise on the world economy.* In particular, it broadens the analysis of the role of the “global imbalances”, on which I (and many others) have written.

The paper points to four salient features of the world economy during this decade: a huge increase in global current account imbalances (with, in particular, the emergence of huge surpluses in emerging economies); a global decline in nominal and real yields on all forms of debt; an increase in global returns on physical capital; and an increase in the “equity risk premium” – the gap between the earnings yield on equities and the real yield on bonds. I would add to this list the strong downward pressure on the dollar prices of many manufactured goods.

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Steve LeVine and Dexter Roberts, “China Thinks Beyond the Dollar”

“China Thinks Beyond the Dollar,” Business Week

Steve LeVine and Dexter Roberts

May 28, 2009

Beijing’s quest to dethrone the dollar as the world’s dominant currency is a natural strategy for hard-line Chinese leaders bent on undercutting U.S. influence in the world. Yet here’s a twist: A key figure behind this policy drive, Chinese central banker Zhou Xiaochuan, is actually an economic reformer and internationally respected economist. And Zhou’s criticism of America’s runaway public finances and the dollar’s postwar reign in global trade and finance isn’t so easily dismissed.

Beijing is nudging trading partners to use its currency, the yuan, in trade transactions. Meanwhile Zhou, who has served as governor of the People’s Bank of China since 2002, backs the creation of a “super-sovereign reserve currency” managed by the International Monetary Fund that would challenge the dollar’s power. True, the greenback’s exalted status isn’t in immediate danger. However, an international campaign led by China to move away from a dollar-centric global economy is gathering momentum.

In recent days, worries about America’s fraying public finances and dollar weakness have unnerved Treasury bond investors the world over, not to mention Zhou and Chinese Premier Wen Jiabao. Much of China’s national wealth, about 70% of its $2 trillion in foreign reserves, is denominated in dollars.

Zhou earned his doctorate in economics from Beijing’s prestigious Tsinghua University and knows that a bigger international role for the yuan is a fantasy unless China lets its currency trade freely and lifts capital controls on money going in and out of the mainland.

Instead, the Chinese economy is now somewhat hostage to economic policies set in Washington. The U.S. budget deficit has exploded, and the Federal Reserve is effectively printing money to buy Treasury bonds. That’s a recipe for a weak dollar, a bond glut—and a nasty financial hit to Chinese holdings of U.S. Treasuries.

Well-informed Chinese now realize Beijing’s strategy of keeping the yuan artificially low vs. the dollar to stoke exports—and then recycling export earnings back into the U.S. Treasury market—has backfired. Chinese blogs rant about “irresponsible investment policies of the Chinese government, which also happen to be subsidizing the U.S. economy,” says Wenran Jiang, an associate political science professor at the University of Alberta.

LATIN CONNECTION

To reduce its exposure to U.S. economic policy, Beijing is forging currency swaps with Asian and Latin American nations, contracts that provide their central banks with yuan to use in trade with China. More ambitiously, Zhou thinks the IMF should create a new international currency that would be valued against a basket of existing currencies, such as the dollar, euro, and yuan. Instead of recycling unwanted dollars into U.S. Treasuries, a central bank would deposit them in an IMF account offering an interest rate. In theory, the new reserve currency would be more stable than the dollar because it would be “disconnected from economic conditions and sovereign interests of any single country,” Zhou wrote in an essay published on China’s central bank Web site in March.

Such a grand scheme, now backed by Russia and Brazil, is a long shot. Yet Zhou has tapped into resentment about the huge—and unique—funding advantages America enjoys. The U.S. can borrow and trade in its own currency, while other economies with dollar assets must worry about currency swings or U.S. policy shifts. That’s why China’s currency crusade may carry on long after the global recession subsides.

http://www.businessweek.com/magazine/content/09_23/b4134024721528.htm?chan=magazine+channel_news

Michael Wines, “Australia Feels Chill as China’s Shadow Grows”

SYDNEY, Australia — If outlanders tend to associate Australia with kangaroos, broad-brim leather hats and an opera house, many Australians are different. They think of iron ore and bauxite, copper and coal, nickel, gold and uranium, a trove of mineral riches that is their nation’s birthright and the bedrock of its prosperity.

Which explains much of the breast-beating that has ensued since the Chinese announced plans this year to buy a big chunk of it.

Since three state owned Chinese companies said they would buy stakes in Australia’s storied mining industry totaling $22 billion — as much as China’s entire investment here in the last three years — some of this nation’s 21.3 million people have reacted with aggrieved nationalism.

The government of Prime Minister Kevin Rudd, which generally favors the sales, has been savaged as naïvely cozy with China, a view some in his own military appear to share. Opposition politicians have flogged the specter of an Australian future more or less as a giant open-pit mine in which the locals toil, but Beijing takes the profits.

“It’s the Communist People’s Republic of China, 100 percent Communist-owned, buying up sections of the country and minerals in the ground which they will then sell to the Communist People’s Republic of China,” said Barnaby Joyce, who is a leader of the National Party in Parliament. “And we’re going to live off the commission on the way through. They’ll try to make sure we get as little as possible.”

But a few months after the first of the deals was announced, a sharp initial backlash has given way to a more subtle queasiness over whether Australia’s place in the region, anomalous but secure for so long, is about to be altered by the new Chinese giant looming over its horizon.

Nor is Australia alone. From the Philippines to Vietnam, China’s neighbors are recalculating the benefits — and potential deficits — of life in the shadow of a newly dominant nation.

Australia has always been the West’s outpost in the East, the British penal colony with American spunk and European joie de vivre. But seemingly overnight, China has become Australia’s biggest trading partner, one of its biggest tourism customers, the largest single buyer of its government debt, a major buyer of farmland and real estate.

China’s hunger for steel gobbles up half of Australia’s iron ore exports, and its textile factories buy more than half of Australia’s wool. Over 120,000 Chinese students throng to Australian schools and universities.

Although China’s purchases remain dwarfed by cumulative investments of the Americans and the British, they are growing much faster.

And suddenly, Australians are stepping back, realizing that their new best friend is someone they really do not know very well, much less trust.

“The momentum has shifted from being broadly receptive to these deals to having a hard think at this,” said Alan DuPont, who heads the Center for International Security Studies at the University of Sydney. “This is not just about China and Australia. It’s about how the world sees China playing its role in the future as a great power.”

Surviving Corporate Invasions

This is not a new question. More than a century ago, Australians fretted about becoming vassals of the resource-hungry British Empire; then, in the mid-1900s, they feared becoming an American subsidiary. When Japan Inc. began snapping up companies in the 1970s, suspicion of Tokyo ran rampant.

The British and Americans proved good corporate citizens, however, and Japan’s expansion faded amid economic problems. Now, Australians are asking whether China will be different.

In one way, it assuredly is. Western companies, if at one time equally ravenous for Australia’s resources, are not direct appendages of their national governments. The dominant shareholder in major Chinese resources companies is the Chinese government.

China has 115,000 state owned companies; the cream are more than 150 giants controlled by the central government. Those corporations — in mining, steel, finance, communications and other crucial areas — seek to make profits much as Western companies do. Government boards audit them, appoint their top executives and evaluate their performance, but in general, the companies insist, Communist Party leaders do not meddle in business strategy.

Even if that is true, China has long insisted on maintaining state control over companies in crucial industries, blurring the line between national and corporate interests.

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“Geithner’s good start in Beijing,” Financial Times

Geithner’s good start in Beijing, Financial Times Editorial

Published: June 1 2009 20:06 | Last updated: June 1 2009 20:06

The US and China are locked in a teetering dance, each grudgingly matching one another’s first steps. This week, in a speech at the start of his visit to Beijing, Tim Geithner, US Treasury secretary, set out a plan for how this relationship can develop into a more graceful arrangement. Mending the world economy, however, must go beyond mere bilateral talks.

Mr Geithner’s speech was geared towards both US and Chinese audiences. He sent a reassuring message to China, the largest buyer of US government debt, about his plans to cut the fiscal deficit. By setting out his stall first, the Treasury secretary managed to avoid the impression of being an incorrigible wastrel, summoned to see his suspicious bank manager.

Mr Geithner also noted that China needed to change its economic model. Beijing does need to move away from its export-orientation. But, by acknowledging that the US is equally responsible for the world’s economic imbalances, he made his case without upsetting his hosts. This was no mean feat.

In the run-up to the crisis, Chinese strip mills fed American strip malls. Chinese savings financed American consumption. In the future, the US must save more and the Chinese people must create more final demand.

This is easier said than done. If China stops financing the US deficit or US consumers stop spending too rapidly, the crisis will enter a new, darker chapter. In the longer term, making China less parsimonious and the US less voracious means re-engineering both economies. Re-establishing habits of thrift in America will be painful; no one wants to cut consumption.

Chinese demand is limited by workers’ income, which is a mere 40 per cent of national output. Demand also suffers because, lacking a robust social security system, Chinese consumers save up as insurance against illness and unemployment. Building a social safety net and redistributing money from Chinese corporations to workers would mark a generational shift with serious consequences for the elite.

In the short term, China and the US can do only so much. The G2 is the world’s most important bilateral relationship; it accounts for 31 per cent of world output and a quarter of its trade. While their relationship is crucial, the world cannot be brought back into kilter by these two Goliaths on their own. Global economics is a multilateral affair today, a dance with several partners. Mr Geithner and his hosts should bear that in mind.

http://www.ft.com/cms/s/0/10adcf3c-4ed5-11de-8c10-00144feabdc0.html

Copyright The Financial Times Limited 2009