Thursday, August 25, 2011


Various takes on the crisis of American economy established itself a seat at the info-streams of news agencies, newspaper pages and analytical magazines all over the world. Decrease of the U.S. credit rating has produced a boomed echo at the world exchanges and made the governments of the countries that lent money to the largest economy in the world seriously pondering over their actions. The U.S. State Department has seemingly come up with a way for pacifying the most bellicose of them.

Various takes on the crisis of American economy established itself a seat at the info-streams of news agencies, newspaper pages and analytical magazines all over the world. Decrease of the U.S. credit rating has produced a boomed echo at the world exchanges and made the governments of the countries that lent money to the largest economy in the world seriously pondering over their actions. The U.S. State Department has seemingly come up with a way for pacifying the most bellicose of them.
The most complicated relationship was established between the USA and China — its major lender. Mutual dependence of two largest economies is obvious. Being in need of an American outlet for its exported goods, the PRC is purchasing American bonds in order to maintain the American solvency. Beijing has accumulated these bonds for the amount of $11.6 trillion if a day. Besides, 70% of Chinese currency reserves consist of the U.S. dollars. Chinese anxiety with the American crisis is more than understandable. So, on the 6th of August Chinese state information agency Xinhua stated the following:
“Being the largest lender of the only superpower in the world, China has a right to demand dealing with a debt issue and guaranteeing of the Chinese dollar assets from the USA. The United Stated cannot let their internal pre-election affairs threatening the global economy. It is necessary to impose an international supervision over the U.S. dollar. The solution to this problem might be the establishment of a new stable world reserve currency, which would’ve allowed avoiding the global disaster, caused by a single country”.
Xinhua statement is impressive, indeed. Demanding an international supervision over the U.S. dollar means offering the USA to sacrifice a part of its sovereignty for the international lenders council. Generally, this is a casual bankruptcy procedure for the “management enterprise” but Americans will hardly like it. Despite the fact that Chinese behavior throughout the entire history of the U.S. economic troubles is no less than defiant, we have to admit that China has all the grounds for that. Four years ago sovereign China Investment Corporation (CIC) started and active expansion at European and American market. The fund was created in autumn of 2006. Its initial capital, allotted by the Chinese government, made up $200 billion. At first this budget was split into three parts. One part was planned to be spent for merger with a Central Huijin Investment, which manages the state assets. The second part CIC was allowed to invest into the foreign companies, and the third part was to be spent on restructuring of certain banks, including the Agricultural Bank of China (ABC) and the China Development Bank (CDB).
CIC first invested money into an American company in May of 2007, when he invested three billion dollars into American investment company Blackstone. Then Chinese fund spent five billion dollars to buy a 9.9% share of Morgan Stanley Bank. It also participated in the VISA IPO — the volume of its investments made up $200 billion. On the 15th of April, 2008 we knew about yet another CIC investment project. The Fund acquired 1% of the British Petroleum oil company for $2 billion. Recently Chinese government has been trying to increase the return on their golden reserves — the largest ones in the world, by the way, their value make up $1.68 trillion. These means lie within the competence of the Chinese State Administration of Foreign Exchange (SAFE), which also participates in the investment policy. In the beginning of April, 2008 SAFE acquired 1.6% share of the French Total for $2.8 billion.
SAFE infused $2 billion into the U.S. mortgage system, having participated in the TARP and buying the “toxic” securities off American banks. The decision about new investments was made, when in the end of July, 2009 the USA and China have carried out yet another meeting of a bilateral “Strategic and economic dialogue”, during which Chinese authorities have raised an issue of safety of Chinese investments into the U.S. economy. Speaking of the U.S. mortgage market, CIC also participated in PPIP (Public-Private Investment Program), organized by the U.S. Treasury.
“Chinese government is always trying to find a better way of investing into the U.S. assets, instead of just buying off the state bonds. Some people might think that $2 billion out of a $200 billion state fund is not an entirely mind-boggling sum, but it might be treated as an innovative and positive opportunity for Chinese investments”.
This text was published by the Reuters agency, which referred to a source, familiar with the intentions of the Chinese fund leadership. CIC is going to build up its presence at the U.S. media market as well. According to the data of the British The Times, CIC has started the negotiations regarding purchasing of its share in two unidentified American direct investment funds, which own large shares of media holding companies and cinema industry.
Also an opportunity of CIC, investing into at least a single major Hollywood studio has been discussed. Investments into the media business and filmmaking will make CIC (and the Chinese government along with that) the direct owner of the broad circle of media production — from the South-Korean soap operas and the Japanese entertaining shows to the world-famous Hollywood blockbusters and cartoons.
Chinese fund studies an opportunity of obtaining large shares in the European and Asian (South Korean as well) production companies. Apart from that CIC is going to buy the shares of two newly-emerged Chinese own media companies. According to analysts, Beijing is not only willing to diversify its foreign investments, but also to take part in filmmaking — at the Hollywood studios, too.
Deputy Director of the Communist Party Bureau of Political Studies Chen Sing Li claims that China has to use its huge currency reserves for purchasing resources abroad. CDB consultant Liu Kegu believes that China has to purchase as much assets, necessary for production of oil, gas, metals, grain and other raw resources as possible.
In 2010 CIC profit from all of its activities made up $51.6 billion, which was 24% more than in 2009. Fund profitability made up 11.7% last year — at that, by the end of the year fund managed the assets in the amount of $409.6 billion. Such indices make the CIC the largest sovereign fund in the world and reaffirm the PRC’s right to demand financial security guarantees from the USA.
European financial crisis hasn’t left China indifferent either. Delegations from Madrid, Lisbon and Athens land in Beijing one by one. In eager rivalry they swear oaths of eternal friendship and occasionally try to find out, what they may reckon upon. According to Stephen Yen, SLJ hedge fund analyst, Chinese have already bought the same amount of European debtors’ obligations, as the European Central Bank owns. European companies don’t fall too far behind the European governments. Saab was next after Volvo to negotiate with the PRC government. Dutch Viktor Meyers, the only foreign share-holder of the Chinese law company DeHeng Law Offices says that a number of companies, willing to sell themselves to a Chinese investor are applying to him on an annual basis.

Joe Biden with his granddaughter Naomi in a Beijing restaurant
In a situation, when Beijing has nearly started to practice power-play in its talks with Washington, while the White House office has almost nothing to counter the Chinese worries with — apart from assurances of the U.S. solvency — U.S. Vice President Joe Biden paid a “good-will visit” to China. The goal of the visit is quite clear — to shake hands with Chinese leadership and reassure it that “everything’s going to be all right” with the American economy.
Before these meeting took place, Biden decided to secure the support of common Chinese. He visited a popular, cheap, yet famous for its cuisine, restaurant “Stewed liver”. In order to establish a closer contact with the restaurant visitors, he took his granddaughter Naomi with him and held a speech, explaining how much loves Chinese cuisine and how awkward he feels about disturbing the frequenters of this dive with his presence. This news made the headline of the Chinese Global Times, which has even published a photo of a high guest’s dinner. Mr. Biden had pork dumplings, offal soup and stewed pork offal — not entirely exquisite, but plain, cheap and with a local fleur.
U.S. Vice President photographed with admired Chinese, one of whom has even greeted him in English. New American Ambassador to China Gary Locke, who has recently became a star of the Chinese Internet, has also fetched himself besides Vice President’s granddaughter. His photo with a backpack and a six-year-old daughter, taken when he was buying a cup of coffee in the airport, posted at Sina Weibo (Chinese Twitter) was viewed by 40 thousand people, who left 8.200 comments.

Gary Locke orders himself a cup of coffee in the airport
Recent photo of Barack Obama has also become a Chinese sensation. He was leaving the airplane in the Shanghai Airport with an umbrella, while a number of Chinese party functionaries and bosses met him — assistants held umbrellas over each of them. Once of the comments to the photo of an American Ambassador said: “That’s how the statesman, actually serving his people, has to look like”. It seems that Uncle Mao is still well-remembered in China. “Serving people” was one of his most famous mottos.
All these efficient PR moves indicate that the State Department is quite familiar with the Chinese mentality. China is dynamically developing and it’s difficult to suspect the 55-million-people state machine in the lack of efficiency, yet the social tension within Chinese society grows along with economic stratification. Many common citizens of the Celestial Empire have little love for bureaucrats, labeling them with unflattering epithets. At that background American emissaries are hasty to demonstrate their Beijing lenders that they’re well aware of the pain spots of a partner, trying to raise its voice.
Replying to a spiteful remark of Xí Jìnpíng, PRC Communist Party First Secretary, who said: “I known that recently you’ve been preoccupied with internal American affairs”, Biden said “You are our primary American affairs. I’m absolutely sure that the global economic stability is largely based upon the cooperation between the USA and China”. It seems that Biden was telling the truth. American diplomacy has never radiated so much charm in the Eastern direction before.

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