April 20, 2006

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China exchange controls relaxed

It was always likely that as President Hu goes to visit George W. that Comrade Hu would announce a flurry of changes and deals to defuse the political pressure over the China economic bogeyman story. And the Chinese have made a signficant couple of concessions in partially liberating their capital account. But as always, irony abounds in these measures.

Firstly, domestic companies will no longer be subject to quotas in overseas investments. This means more Chinese companies can follow the example of CNOOC and try buying American assets, only to be chased off by aggressive, almost racist, protectionism. If Dubai Ports causes such a fuss, imagine what the fuss when a Chinese company tries buying GM.

Secondly China's banks get approval to manage assets abroad. Instead of China's central bank buying these assets, effectively private investors can use banks to do instead. It's outsourcing, China style.

The end result of these two measure is Chinese funds can flow out the country more freely. This should weaken the yuan and strengthen the US and other currencies. And that is the ultimate irony, because the American senators and others have long been complaining the yuan is undervalued. Both of these measures shift the huge foreign exchange reserves out of SAFE and into the funds management arms of the banks and the investments of Chinese companies abroad. Will it magically reduce the trade surplus problem? In the longer term it should and will. In the short term, no. In the short term, the problem is Americans (especially government and consumers) spending more than they save. That's not the fault of the Chinese.

posted by Simon on 04.20.06 at 09:57 AM in the China economy category.


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Ironically, Lou Dobbs (aka "xenophobic protectionist CNN anchor/ranter") agrees with your last point: http://www.cnn.com/2006/US/04/19/dobbs.hu/index.html
Well, sort of. "Corporate America sold out the middle class (first to Japan in the 80's, then to Mexico and China)." That last sentence is all you need to know about Lou Dobbs and the Democratic party before Bill Clinton.

posted by: 88 on 04.20.06 at 02:11 PM [permalink]

I don't think too many Anmericans will care if GM could find a willing buyer. Good riddance, just like Chrysler. The Japanese make more cars in America than the Americans do anyway. Not too many people cared about IBM's laptop division going to Lenovo. And, in spite of high gas prices, the average American (non-politician) cared little about the Chinese bid for Unocal.

Dubai Ports was different because it was perceived (wrongly, in my opinion) as a public safety issue. That said, lots of countries use the public safety canard more than Americans do. But they seldom ever get called on it because we have to be "understanding of their sensitivities".

posted by: sanbao on 04.22.06 at 01:14 AM [permalink]

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