CHINA -- AN EMERGING SUPERPOWER (Repeat)

Our article on China, posted prior to the G-8 meeting, had moved off the blog's main page. We were asked if we would repost it -- and are doing so for the benefit of those who did not have the opportunity to read it previously. We also expect to update this in the near future.

CHINA -- AN EMERGING SUPERPOWER

At Hill and Street News, we have been and remain keen observers of what we believe are China’s strategies to become “the” new global superpower. Undoubtedly, our readers have noted our frequent reference to China, notably with respect to its growing political and economic power, its monetary policies and its prolific accumulation of natural resources.

First, it is entirely understood that United States and China have close economic links, particularly since China now holds more U.S. Treasury debt securities than any other country – and, of course, each is the other’s second-largest trade partner. Perhaps instead of speaking of “links”, we should allude instead to China’s huge position of power over the U.S.

To put the near-term economic growth outlook for the United States and China in perspective, consider information from the Washington-based International Monetary fund:
“Developing Asian economies, led by China and India, will expand 4.8 percent this year while the U. S. contracts by 2.8 percent and the euro area by 4.2 percent,” reported the IMF according a June 30, 2009 Bloomberg article titled, Asia Junk Bond Returns Top Stocks, U.S., Europe Debt. But the World Bank late last month raised its forecast for China’s economic growth this year to 7.3 percent and for 2010 it predicts China’s GDP growth will accelerate to 7.7 percent.

So while the Chinese economy is expected to expand this year, the economy of the U.S. is expected to contract.

And now let us glance at that U.S. debt, largely held by China. A June 29,2009 examiner.com article titled “Financial future of U.S. worsens under Obama”, that presents an abbreviated version of a Washington Times article of the previous day, cites that according to the U.S. Commerce Department, foreigners now hold 50 percent of our country’s publicly held debt – or 25 percent of the US national gross domestic product. And then it explains that if those foreign investors, “such as China, significantly reduce their purchase of future U.S. Treasury debt securities, without even dumping their current holdings, U.S. interest rates could soar and the dollar could collapse.”

Further:
“Three decades of massive ‘trade’ deficits have converted the United States from the world’s banker – able to pay any price and bear any burden in the cause of freedom’ – to the world’s largest debtor, utterly dependent on China and other foreign interests,” according to Charles McMillion, chief economist of Washington-based MBG Information Services. “We are so deeply in debt and this money is so liquid that it hamstrings our monetary, fiscal and trade policies. We’ve really mortgaged our financial future.”

And whether you accept or agree with information provided by Sen. Judd Gregg in a June 30, 2009 article at unionleader.com, this information is chilling and at least worth considering.

This article cites Gregg’s belief “that because of Obama administration spending, the U.S. will have budget shortfalls, or deficits, averaging $1 trillion each year for the next ten years.” Later it states that “By the end of the budget period as proposed by the President, the debt will have skyrocketed to 82 percent of GDP, which is not sustainable.” And further, it echoes previous sentiment that if the Chinese, who have already expressed concern about U.S. debt, “start to reduce their purchases of our government securities because of our need to borrow increasing amounts of money to finance all of the spending that the President has proposed, we will have to start offering higher interest payments to potential leaders to make our securities more attractive.”

Without a doubt, regardless of which political or economic leaders are believed, there is sufficient and convincing evidence at every turn that the U.S. is economically in a serious situation.

China, on the other hand, seems to be positioning itself to become “the” superpower – and more and more businesses want access to China’s markets.

Just watching headlines: June 30th, a People’s Daily Online headline reveals, “European businesses wish to invest more in China” – and in the body of this story, “European enterprises believe that China’s economy can recover earlier in the global downturn.” A recent New York Times article revealed, “Bain Capital, an American private investment firm, said Monday that it had agreed to invest as much as $432 million to acquire a minority stake in Gome Electrical Appliances, one of the biggest Chinese retailers.” This was termed “one of the largest American investments in a mainland Chinese company.” These are just a couple of numerous such stories.

Yes, there seems great interest in China, and why not. As Eswar Prasad wrote in a review of the book, The Chinese Growth Experience: A Golden Tapestry, “an economy that has grown at an average rate of about 10 percent per annum for over two decades, has over a billion people, and has vaulted over others to become the third-largest in the world tends to draw attention.”

THE EMERGENCE OF THE YUAN

Garnering considerable recent attention, Li Lianzhong,a senior researcher with the Communist Party, strongly suggested that China should buy gold and US land. “The US is printing dollars on a massive scale,” Li explained, “and in view of that trend, according to the laws of economics, there is no doubt that the dollar will fall. So gold should be a better choice.”

But he also suggested that an additional reason to buy gold is that the metal is considered necessary for an escalation in the role of the Yuan – “that if the yuan should go international or become a reserve currency, China needs more gold to back that.”

Li, who heads the economic department of the Party’s research office, opined that the yuan should become a fifth currency in the International Monetary Fund’s Special Drawing Rights. And he further suggested that it should have an equal 20 percent weighting with the US dollar, yen, euro and sterling.

Within days of Li’s report, the People’s Bank of China issued a statement saying that China expects to request a reform of the international currency system that will make it more diversified.

On Monday of this week, June 29, China and Hong Kong signed a deal that cross-border trade would be with the yuan – seen as a step in increasing the position of the yuan. Governor of the People’s Bank of China in Hong Kong, Zhou Xiaochuan, earlier this year even suggested the idea of the yuan replacing the dollar as the benchmark global currency.

And then today the Financial Post blarred the headline that China wants “to debate proposals for a new global reserve currency at next week’s Group of Eight summit in Italy." Further in the article, “The debate centres on proposals by some emerging powers that an alternative should be found to the U.S. dollar as the global reserve currency, to reflect the shifting balance of power in the globalized economy.”

Seemingly in support of an escalation in the role of the yuan, Russian Finance Minister Alexei Kudrin had previously said, “I think the shortest route would be if China liberalized its economy and allowed the convertibility of the yuan. … This could take 10 years, but after that the yuan would be in demand and it is the shortest route to the creation of a new world reserve currency, and I think China needs to think about this.”

U.S. LAND, OIL AND NATURAL RESOURCES

Li, of course, also suggested that US land is now a better investment for China than US securities. And, in fact, even before his suggestion, the Chinese had started to invest in U.S. real estate. "At the aptly named ‘America Is for Sale Expo,’ which occurred in Beijing in April 2009, Chinese buyers grabbed more than $100 million in U.S. real estate. Shortly after the expo, it was reported that an additional $400 million in sales was in the works. And another expo is scheduled for October.”

Further Li said that China should dedicate more of its $1.95 trillion in foreign exchange reserves to buying energy and natural resource assets – and, of course, when he spoke, it was widely understood that China has been gobbling up oil and natural resources for quite some time now.

China has been on a natural resources spending spree – not only buying companies outright, but also establishing relationships with other countries, as the nations of Africa, that give China access to natural resources.

In June, 2009 China’s state-owned Sinopac Group made the largest overseas purchase by a Chinese company ever, agreeing to pay US$7.19 billion for oil exploration company, Addax Petroleum Corp. This acquisition provides China with production capacity and reserves in West Africa and the Middle East.

The Wall Street Journal recently reported, “In the past year, Chinese state-owned companies have been encouraged to make acquisitions by a central government convinced that the global financial crisis has created an unmatched buying opportunity. They are taking advantage of depressed asset prices and access to Chinese credit to strike deals designed to secure the resources needed to power China’s growing economy." Further: “deals like the Addax acquisition show they are gradually growing into international oil companies, capable of striking high-profile, cross-border deals. They are even expanding into countries, such as Syria, deemed too risky by Western oil companies.”

And in March of 2009, a Financial Post article read: “Asia’s dealmakers say a Chinese resource spending spree will accelerate throughout the next 12 months, with Canadian mining and energy companies likely on the shopping list.” In the weeks preceding the publication of this article, it says: “With the backing of Beijing, cash-rich Chinese investors have spent the past several weeks working on a spate of overseas resource deals.” And while much of China’s spending had been directed toward Australia, “as the number of Australian targets shrinks, ‘low valuations elsewhere will likely move the focus to North America, particularly resource-rich Canada,” said Richard Griffiths, managing director with Royal Bank of Schtland’s M&A team in Hong Kong.

Of course, there was the well-publicized attempt by Aluminum Corp of China to buy Australian mining giant Rio Tinto for $19.5 billion, but Rio Tinto turned that offer down.

And while China has had no shortage of interest in acquiring oil and natural resource companies, its expansion spans beyond those sectors. Middle East North Africa Financial Network reports, “Mergers and acquisitions is a burgeoning industry in China. In the past year Chinese state-owned entities have successfully acquired minority interests in foreign banks and other financial institutions, and not all as a result of the credit crunch. … Financial news headlines around the world may be bemoaning a global slowdown, but Chinese M&A is definitely alive, well and expanding.”

Earlier we authored an article posted here that highlighted “compelling indications that China is not only strengthening economically and industrially, but that (it) is establishing strong footholds in oil-rich nations of Africa.” With such relationships in place, one has to wonder whether these African nations will sell exclusively to China. And, of course, it is understood that the U.S. and China may well be competing for global oil.

And even within its own borders, China has been on a spending spree -- including miles of high-speed rail lines and a new bullet train from Beijing to Tianjin which travels at up to 217 miles an hour. Money is going into other projects such as airports, highways and environmental projects. Unlike the U.S., China has few debts, only a small deficit and plenty of cash to pay for their construction boom and their expansion into a whole new level of global competition.

China’s emerging world dominance is evidenced within our own U.S. stock market. Three of the five largest companies in the global Russell index are now Chinese -- and PetroChina has replaced Exxon Mobile as number one based on market capitalization.

“In the past two years, we’ve really seen more quantitative evidence mounting about a shift in investment dollars flowing into China and related countries,” said Stephen Wood, chief market strategist for North America at Russell Investment. “The move up by PetroChina might not be significantly great in a strict statistical sense, but it’s going to grab some headlines. The transition in global economic power is under way.”

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