The alliance between the Chinese state – lest we forget, still a (nominally) communist state -- and the high priests of global financial capitalism is close to complete.Among the ironies he notes:
...Asian and Middle Eastern governments – through their investment funds -- increasingly are playing a role in Western economies that voters do not necessarily think their own governments should play.Note: "the City" is London's financial district.China's investment in Barclays is coming from a lender theoretically devoted to "development" -- both domestic infrastructure lending and subsidized lending to Africa. I guess there is more poverty in the City than I thought. Either that or China Development Bank is now more commercial than China's state commercial banks...
...And it increasingly seems like the highest stage of Chinese communism will turn out to be financial capitalism. I am not quite sure that anyone would have guessed back in 1949 that China’s communist government would be invited into Wall Street and City board rooms – or, for that matter, that China's communists would ever have accepted.
Why is the Chinese government buying everything? A country with a trade surplus is selling more goods abroad than it is receiving in return - the gap is filled by financial assets. That is, China sends goods to the US and receives stocks and bonds in return. China has also been keeping the value of its currency low by selling Yuan for Dollars; in doing so, it accumulates massive Dollar holdings. In the past, this has mainly been invested in US Treasury securities, which has helped keep US interest rates low, but lately China has begun diversifying its investments into other types of assets.
4 comments:
No matter how much the government emphasizes patriotism, people, including officials working in the government, lack confident in anything made in China. The first thing my relative from Mainland bought in Hong Kong was sugar, because there was too many fake suger in the Mainland. I have heard a hugh flow of Chinese teenagers being sent to British boarding schools. Given the potential crisis in the financial system, it is understandable for a Chinese bank to diversify. We can also look at it this way: the behavior of Chinese investment does not suffer from the home bias puzzle as we observe in the U.S. and in Europe!
Thanks, Ming. That's a good point about "home bias." Though this issue does raise Lucas' question: "why doesn't capital flow from rich to poor countries?" I read alot about the political tensions between HK and China, but the social implications you raise are interesting.
I haven't focused much on Lucas' argument. However, I have a more philosophical response. Economists tend to explain things in terms of equilibrium. So if you have two countries, one poor and one rich, and theories tends to explain that the poor one is likely to grow faster so the rich one will pour money into it.
The problem is that these theories ignore one thing: why a poor country is poor and a rich country is rich to begin with. In the case of China, you can't say it has poor endowment, or it suffers from a late start. China is poor because investment does not pay off.
Friedman wrote a methodological paper claiming that the assumption of profit maximizing is fine because non-maximizers will be eliminated in the market. Clearly, there are losers in the market, but the process of elimination is SLOW. Economists have yet to create a theory to explain how poor country will continue investing in the rich one until the poor country itself collapses. That's because equilibrium theories assume the continuation of all entities.
In open-macro models, when was the last time we see a two-country model transforms into a one-country model becasue one of the country got "eliminated". Economics is based on "winner" models, not "loser" models. Sociology and anthropology, on the other hand, study "losers" more. Consider Jared Diamond's Collapse.
This of couse does not mean China will disappear. But consider the immaturity of the Chinese market economy and the stock market, wouldn't you consider the chance of a Great Depression, an exchange rate crisis, a stock market collapse, etc. is more likely than the U.S. and Europe? Here, I do not even speak of political changes...
Same applies to Russia and Middle East. If you have extra bucks to spend, would you put money in a Russian soccer team or Chelsea, donate money to an university in a country with restricted academic freedom or Havard/MIT? There are exceptions, of course, like Dubai.
To conclude, sometimes, or probably very often, a poor country is poor because of institutional corruption. Continuing pouring money into such a country does not make sense.
You're absolutely right that institutions are crucial for growth. China seems to have found a set of institutions conducive to rapid growth, but one does wonder if those institutions will be appropriate for a higher stage of development. You seem to have doubts... (so do I, but I've never been there!). And if the Chinese government is investing so much abroad, is this a sign they have doubts too?!
Post a Comment