(snip)"The idea of the Chinese state buying into a thoroughbred Western bank - and thereby gaining exposure to potentially the biggest banking merger in history - seems impossible. But that's precisely what happened last week, when the China Development Bank, an arm of Beijing's Communist government, took a sizeable stake in Barclays.
The City was caught off guard. At a stroke, China had re-ignited Barclays' multi-billion pound bid for ABN Amro, the Dutch bank, giving the British group fresh hope of pipping a higher offer from a rival consortium led by Royal Bank of Scotland. But the impact of this move goes way beyond the outcome of a single deal - however big that deal may be.
This latest foray into foreign ownership by China's government raises serious questions - about the role of the state, the future of East-West relations and, above all, the shape of the global economy.
Everyone knows that China, Russia and India are growing fast. But it cannot be stressed enough that these "emerging giants" are in the midst of the quickest industrial revolution the world has ever seen.
Since 1997, the British economy has expanded by 54 per cent. America has registered similar GDP growth, with Japan and Germany not far behind. While reasonably strong, this performance has been eclipsed by China, Russia and India - which have all easily registered triple-digit percentage growth over the past decade. Some smaller oil-rich nations have grown faster still.
Back in the late 1990s, such Eastern economies were highly precarious. During the so-called Russia-Asia crisis, their currencies and stock markets collapsed, sparking a fully blown global slump.
These days, a new world economic order prevails. Fuelled by supercharged growth, the likes of China, Russia and the rest are exporting in vast quantities - everything from commodities to finished goods. They have built up huge trade surpluses and foreign exchange reserves.
Expressed in dollar terms, these economies are still much smaller than their Western competitors. But when measured on a "purchasing power parity" basis, which takes account of local prices, the "emerging giants" are already huge. China is gaining fast on America, India is the world's fourth largest economy and Russia is the seventh.
Far from harming the global economy, such countries have instead been spending their reserves on Western government bonds, funding the deficits of "advanced" economies such as Britain - and in turn fuelling a worldwide boom in asset prices.
China now has the biggest reserves of all - a cool $1,100bn. Other previously weak countries are also sitting on piles of cash. That's why there's now a pressing desire in the East to diversify away from foreign debt and into tangible foreign assets.
In other words, as this Barclays deal shows, such governments are now moving from lending to the West to owning chunks of it.
"China now has all the reserves it needs for stability," says Gerard Lyons of Standard Chartered. "So it is now pursuing a go-abroad policy, establishing global ambitions."
Mohamed El-Erian, a former executive at Pimco, the bond giant, who now manages Harvard University's huge $30bn endowment, agrees. "For many of these countries," he says, "the issue is no longer crisis management but rather how to meet the challenges of success. Their mindset is shifting from traditional reserve management to wealth management."
This shift is reflected in the emergence of "sovereign investment vehicles", the most visible manifestation of what investors are now calling "state capitalism". With Dubai's purchase of P&O in 2005 and Qatar's recent bid for J Sainsbury, Western private sector assets are increasingly being targeted by the governments of the new economic elite.
Now China is taking this process to a higher level. Last month Beijing used $5bn from its reserves to form the Africa Development Fund, which will focus on developing the continent's oil and mineral wealth. At a time of growing anxiety over energy supplies, Western politicians will shudder to think of the Chinese influence such lavish sums will buy.
China has also earmarked a staggering $200bn-$300bn to fund further foreign acquisitions - the now famous "wall of Chinese money". Ever pragmatic, Beijing's leaders last month used the first slice of that cash to snap up 10 per cent of Blackstone, the US private equity house. Blackstone's finest minds are now advising China on its Barclays stake."(snip)
From a skeptical point of view, China's buying of an ever larger stake in Western financial institutions amounts to cutting western gov'ts out of the financial 'loop'. Prior to this move by China, as US/UK consumers purchased Chinese products, it was necessary for the resulting trade deficit to flow back into the US/UK via the Chinese purchase of US/UK gov't bonds, which then passed to US/UK financial institutions, who in turn lent out that money to US/UK consumers so they could buy yet more Chinese goods.
However, as the Chinese increase their directly owned stake in major US/UK financial institutions it will be possible for the Chinese to recycle their trade deficit dollars/pounds directly to these financial institutions in the form of private loans - which will cut out the current step of trade deficit dollars/pounds having to pass through US/UK gov't bond purchases first before being recycled to US/UK consumers. In doing so, whatever control the US/UK gov'ts still have over liquidity / currency inflation / interest rates of their own currencies via controlling the available supply of new gov't bond issues will disappear !!!
Taken a step further, Chinese direct ownership of major US/UK financial institutions will also undoubtedly place the Chinese in a position of exercising veto power over future loan / financing requests by US/UK corporations ... with loan approvals or denials based on whatever criteria the Chinese choose to apply. God knows the Chinese don't NEED to make loans on the basis of interest rate profits, since they are already swimming in trade surplus profits.
Thinking back to the US gov'ts decision to bar the Chinese from making a takeover bid for Unocal for 'strategic' reasons, it is ironic that the Chinese may now wind up owning a piece of Unocal (and many other US/UK companies) via the 'back door'.




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