Living with a global economy has given protectionists plenty to gripe about.
In the 1970s and 1980s, it was the Japanese. At other times European investors have been the object of protectionist scorn. But over the last 20 years, it has been the emerging economies of the Arab nations and China.
CBS’s April 6 “60 Minutes” warned one Chinese investment firm in particular posed a “special concern.”
“All together, the sovereign wealth funds of countries like Abu Dhabi and Kuwait have spent over $30 billion bailing out our financial system, which has raised some troubling questions,” CBS correspondent Lesley Stahl said. “Are these mostly undemocratic regimes saving Wall Street or invading it? One fund is of special concern – it’s new, highly secretive and the fifth largest in the world.”
Sovereign wealth funds are money derived from a country's reserves which is intended benefit that country's – in this case China’s – economy and citizens. The funding comes from central bank reserves that accumulate as a result of budget and trade surpluses, or in some cases generated by exports of natural resources, including oil.
The fund Stahl referred to is China Investment Corp – a sovereign wealth fund with $200 billion to invest in the United States. But $200 billion is barely a drop in the bucket for a $13-trillion economy. That didn’t stop Stahl from taking a stab at the fund’s president.
“This is the fund’s president, Gao Xiqing. Yes, it rhymes with ‘ka-ching!’ Stahl said. “Last year, he decided to pour some of those billions into investment houses on Wall Street.”
However, the Chinese are investing in the U.S. economy because it makes the most sense. There is no economy large enough except for the U.S. economy and China’s growth is largely dependent on the success of the American economy.
“For the past five years or so, China has been throwing around huge amounts of cash,” Dr. George Friedman, CEO of Strategic Forecasting, Inc., wrote in a piece for Kiplinger’s December 2007 issue. “The Chinese made big, big money selling overseas – more than even the growing Chinese economy could metabolize. That led to massive dollar reserves in China and the need for the Chinese to invest outside their own financial markets.”
“Given that the United States is China’s primary consumer and the only economy large and stable enough to absorb its reserves, the Chinese – state and nonstate entities alike – regard the U.S. markets as safe-havens for their investments,” Friedman wrote. “That is one of the things that have kept interest rates relatively low and the equity markets moving.”
“The United States is historically a debtor country,” Friedman explained on the Dec. 17, 2007, “Dennis Prager Show.” “For about 60 years in the 20th century it wasn’t, but usually it is for a very simple reason – this is a place where people want to go and invest their money. And, we take that investment from around the world and we grow our economy – which is what has made our economy as huge as possible.”
But Stahl didn’t recognize the potential of the American economy in her segment. Instead, she relied on Peter Navarro, an economist who is convinced that Chinese investment is purely a product of bad intentions.
“I think that the Chinese can say, ‘Well, you’re singling us out,’” Navarro said. “And we say, ‘Yeah, we’re singling you out. We think based on your historical behavior, China, that you’re going to do mischief in our economy.’”
Stahl warned viewers of the possibility of the worst-case scenario – what she and Navarro called the “nuclear option.”
“In other words, we’re all but dependent on Chinese investments,” Stahl said. “Beyond this new fund, China holds half-a-trillion in U.S. Treasury bonds. So economist Navarro says they have us over a barrel. If they don't like our behavior, they can dump all their investments. It’s known as the financial nuclear option.”
“What would that do? That would cause interest rates to spike, mortgage rates to spike, inflation to spike, the dollar to go through the floor, the stock market to go into chaos,” Navarro added. “We would be in deep, deep, deep trouble.”
But there’s a reason the Chinese wouldn’t do that – because in the long run, it wouldn’t work. It would also end up hurting China. The Chinese would have nowhere to put that money and eventually, money would come back into the United States from other places.
“For them [the Chinese] to sell it off, you’d have to ask where are they going to put it,” Friedman said. “And the real issue is – let’s say they found ways to stuff it into Europe. Well, they’d force interest rates down in Europe and money would come pouring back into the United States.”
Even Lawrence Summers, a former treasury secretary under President Bill Clinton and the former president of Harvard University, didn’t think the Chinese, specifically China Investment Corporation, were investing in the United States with malicious intent. Summers was the only expert included in the story who did not have a threatening tone about China Investment Corp.
“I think there’s the question of the degree of specificity,” Summers said to Stahl. “But in a way, their willingness to be interviewed and go on your show is probably not something they would do if they thought of themselves as having some nefarious purpose.”
One sensible approach to handling sovereign wealth fund (SWF) investment was suggested by Daniel Ikenson, the associate director for the Center for Trade Policy Studies (CTPS) at the Cato Institute.
“Instead, we should welcome all foreign investment that complies with our laws,” Ikenson wrote in CTPS’s March 14 Free Trade Bulletin. “We have to ensure that any policies we adopt in response to SWFs and in the name of preventing market distortions don’t themselves cause market distortions. Blanket prohibitions or rigid controls on investment from foreign sovereigns are likely to cause resources to be allocated inefficiently.”
Ikenson suggested a “heavy-handed” response would lead to investment into other markets competitive with the United States and might even spark a “tit-for-tat trade and investment war” that would ultimately harm the U.S. economy.