China is using our dollars to go on a global shopping spree. It's been going on under the surface for many years - I saw a great ABC News report on this subject perhaps a year or so ago. The main focus was on China's impact on Africa where they are helping to develop the infrastructure of multiple countries rich in commodities, in return for easy long term access to said commodities. If you saunter over to Bloomberg you can see almost every 2nd or 3rd week a Chinese purchase (almost always of a commodity nature) in some country you only see during the Olympics opening ceremony. It is awesome to see our money going to work! Granted it's not for our future but theirs but we are a generous nation of debtors. What's the saying? America plans out year to year, Japan decade to decade, China century to century?

An interesting Reuters piece here on the resentment building from some of the actions China is embarking upon to secure its future ... we touched about this in the Australian - Chinese connection 2 months ago. [Jun 13, 2009: Australia in Perfect Position Aside China, But at a Cost?]

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.

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.

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.”

It looks like as China emerges as the 2nd global bully... err, gentle superpower - they are facing many of the same issues the U.S. has.

  • From Africa to Europe, the Middle East and the United States, China's drive to project its economic might abroad can sometimes breed fear and resentment. The risks are likely to grow as Beijing channels more of its foreign exchange reserves, which stood at $2.13 trillion at the end of June, into foreign investments.

This is an amazing statistic - they have already passed the US as the largest trading partner with Africa.

  • From having a handful of tiny investments abroad less than two decades ago, China has grown to the world's sixth-biggest foreign investor and overtook the United States as Africa's top trading partner last year.
  • That breath-taking rise has brought problems: allegations from emerging countries that China is stripping them of resources and suspicions in the developed world that obscure state interests lurk behind Chinese investments.
  • Where governments welcome Chinese investments for the boost they bring to their economies, a widely perceived Chinese tendency for Chinese firms to import their own workers has created tensions with job-seekers.

Now recall, the Chinese used to just be happy throwing all the money we send them for goods they create, back into our long term government debt. But as all people who have a long term interest in the ability of their debtors to pay them back one day... China is slowly but surely growing wary of the unsustainable policies of the U.S. They even drop some not so subtle hints from time to time... ahem. [Feb 13, 2009: FT.com - China to US: We Hate You Guys] Thus far while they have not dropped the amount of our debt that they purchase (with our own money mind you) they have been shortening the maturities they buy. Easier to flee the debt someday. [May 21, 2009: China Becoming More Picky About Debt]

China is growing more picky about which American debt it is willing to finance, is changing laws to make it easier for Chinese companies to invest abroad the billions of dollars they take in each year by exporting to America.

The other reason there is almost one universally agreed concept in the economic world. The path the US is headed on will demand much higher rates in the future as we become more and more of a risk. So even if the Chinese believe in us in the long run, there is not a good economic reason to lend us money at 30 year terms at the ridiculous rates the market is offering. I say that in quotes because the good ole Federal Reserve is manipulating rates lower than a true market because Americans cannot thrive without 5.2% mortgage rates.

... new data shows that China is also trading long-term Treasuries for short-term notes, highlighting Beijing’s concerns that inflation will erode the dollar’s value in the long run as America amasses record debt. It has done so in ways calculated to reduce its exposure to inflation or other problems in the United States.

So there are many reasons not to buy long term US debt at this time (although the Federal Reserve is happy to!)... hence while China continues to receive tons of cash from us each month as 1 of 10 retail dollars in America funnels into Walmart, they need to find better uses for it than buying our debt. Hence the moves they have been making lately from opening up financial channels with Taiwan to buying commodity based capability the world over. While we use our money to get Americans to buy cars, TVs (Bush rebate 2008), houses, keep interest rates low, and bail out our financial oligarchs. Like two passing ships in the night...

  • The challenge of how to deal with such tensions will only be magnified as the global slowdown prompts Beijing to pump even more of its foreign exchange reserves overseas.
  • China used to be content to keep its surplus dollars in the bank or in U.S. government debt. But the financial crisis and subsequent downturn have, in some quarters, shaken faith in the strength of the dollar and U.S. Treasuries.
  • With China still needing to secure access to global resources, some Chinese policy-makers are talking about redirecting billions of dollars into overseas investment instead.

Further

  • (Chinese investment) ... include aid with few strings attached, capital for infrastructure that Western donors will not fund and competition that drives down prices.

This is what I saw in the ABC special, I know I know - I should of been watching John and Kate makes Eight instead ...

  • A $9 billion minerals-for-infrastructure deal is presented by Congolese President Joseph Kabila as a cornerstone of his plan to rebuild the Democratic Republic of Congo after years of war. China will build roads, schools and hospitals in exchange for mining rights.
  • In Guinea's capital, Conakry, the Chinese government is building a 50,000-seat sports stadium as a gift.

So it's sort of like colonialism all over again but with investment to placate local officials and citizens. Actually it reminds me of a Twilight Zone episode where the aliens land, give us gifts that benefit us.... all while planning how they will eat us.

  • We are very satisfied with our cooperation with China, said Denis Sassou-Nguesso, the president of Congo Republic on a visit to a hydro-electric dam being built by Chinese contractors.
  • But in some countries, it is the sheer size of the Chinese presence that causes tension. Russian officials estimated that last year there were 350,000 Chinese migrants living in the country's far eastern regions, many illegally. The native population, in an area almost 10 times the size of France, is just over 7 million.
  • Elsewhere, the fact that the lion's share of Chinese investments are from the state itself or state-controlled companies, is the source of friction.
  • China says its investors are forced to go into frontier markets because developed countries lock them out of more stable economies. As a result, they say, the risks they face are higher.
  • China has started to address the damage to its reputation as an overseas investor. Big firms have hired Western consultancy firms to give advice. Many are now seeking local partners, or favoring less high-profile indirect investments.