Friday, September 12, 2008

Daily Sources 9/12

1. The Financial Times published a series of articles yesterday--including an editorial--on China's evident willingness to use its foreign exchange holdings to further political ends. Jamil Anderlini reported that China's State Administration of Foreign Exchange (SAFE) purchased $150 million in Costa Rican government bonds in January in return for Costa Rica essentially de-recognizing Taiwan as a sovereign nation. The deal was originally arrived at in an agreement signed on June 2007, which stipulated the switch in Chinese recognition in return for the purchase of $300 million in Costa Rican bonds and a $130 million grant. Evidently, this information came to light because La Nacion, Costa Rica's largest newspaper, won last Friday a court case which resulted in a judge ordering the government to make the information public.

In a companion piece, Jamil Anderlini noted that while the establishment of the China Investment Corporation (CIC) in September 2007 caused much consternation worldwide, SAFE, through a Hong Kong subsidiary, was quietly establishing stakes of less than 1% in corporations worldwide. It took stakes in companies as diverse as: BP, Total, BHP Billiton, Rio Tinto, Unilever, Tesco, British Gas, Cadbury, Royal Bank of Scotland and Barclays Bank. The Financial Times has helpfully provided a list of SAFE investment in British corporations here.

The FT also editorialized that sovereign wealth funds should be more transparent about their aims and that China should allow the renminbi to appreciate further against the dollar. Brad Setser at Follow the Money has used the imbroglio to announce the publication of a 60 page or so (of actual text) report on Sovereign Wealth and Sovereign Power: the Strategic Consequences of American Indebtedness. I have yet to read the tome, but it will likely be influential.

On one key level, my response to this is "I'm shocked! Just shocked!" Perhaps it is worrying that China is willing to use its foreign exchange reserves to meet foreign policy goals, but I suspect the only difference between that and the de rigeur behavior of economic powerhouses worldwide is that it was a direct, as opposed to an indirect effort. China and Taiwan have been playing this game for years now and it is hardly surprising to me, at least, that China would use any financial asset they have at their disposal to legitimize their claim to Taiwan. (Though I do feel sympathy for Taipei.)

I would also note though the text of the FT's editorial is fairly calm, the series and the headlines are fairly obviously designed to elicit worry and upset nationalists--which is pretty annoying to see from the FT, though I suppose it is arguably meant as an object lesson. Obviously, the financial world wants to encourage "unregulated" access to Chinese assets and a freely floating renminbi. Though some--in Wall Street anyways--view FDI into China and free exchange as unambiguous in its benefits and ends, it seems hard to argue this to Beijing when its overseas investments are regularly responded to as if they were efforts at colonization. The distinctions seem awful fine.

In any case, we will see how the West responds to CIC possibly being a part of the consortium riding to the rescue of Lehman, as per Henny Sender, Francesco Guerrera and Peter Thal Larsen in the Financial Times today. Barclays, beneficiary of SAFE funds, is also a potential suitor. Also related: a paper published today at Vox arguing that the renminbi is not significantly misaligned.

2. China Daily announces that China may cut its dollar holdings. (h/t Jesse's Cafe Americain.)

3. Naked Capitalism notes that both Japan and China have posted declining growth. In order to protect export to the US, China will have to purchase dollars. Also, per Real Time Economics, US consumer spending dropped 0.3% in August, leading many to conclude that that engine of American and international economic growth will remain dormant at least through 2009, which may mean that China needs to buy a lot of dollars.

4. David Barboza at the New York Times writes that corporations in China are under intense pressure from the government to allow their workers to unionize.

5. Saul Hudson at Reuters has an analysis of potential future, given the recall today of Venezuela's Ambassador to the US, and the expulsion of the US Ambassador to Venezuela.

6. Jeremy McDermott at the Telegraph reports that Evo Morales has expelled the US Ambassador to Bolivia.

7. Aleya Begum at Upstream Online writes that Colombia has pledged, despite all the contretemps with Venezuela, to maintain flows of gas to Venezuela through pipeline opened this January at reduced rates.

8. Simon Romero at the New York Times has more on this story, with the US expelling the Venezuelan Ambassador and declaring that the top two intelligence officials in Caracas were involved in FARC operations in Colombia. Sanctions are being considered, I believe.

9. Hurricane Ike appears to have nudged a little north, satellite courtesy the NOAA:

It is a category 2 now. A bunch of refineries have shut down in response. As a result, the cash market is heading north, while the futures market is heading south, as per The Barrel at Platts. Expect higher prices at the pump.

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