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Monday, June 04, 2007

"Buying up the US, Chinese-style"

Brad DeLong continues with the discussion on foreigners acquiring ownership of U.S. assets. How long before congress and the media realize what they should know already, that our "yawning external gap is inevitably financed only by selling off assets, which means that foreigners with money acquire ownership and control of US-based businesses," and what will happen when they figure it out?:

Buying up the US, Chinese-style, by J. Bradford DeLong, Project Syndicate: When China National Offshore Oil Company tried to buy ... UNOCAL two years ago, it set off a political firestorm in the US. When Dubai Ports World bought Britain's P&O Steam Navigation Company, the fact that P&O operated ports inside the US led to more controversy.

One would think that a country like the US, with a current account deficit of roughly $800 billion a year, would realize that such a yawning external gap is inevitably financed only by selling off assets, which means that foreigners with money acquire ownership and control of US-based businesses.

But the US -- or at least Congress and the media -- doesn't get it. Americans evidently hope for a world in which they have feckless deficit-generating fiscal policies, a very low private savings rate and a moderate rate of investment, all financed by foreign capital whose owners are happy to bear the risks yet have no control over their assets.

One might think that foreign investors would quake in terror at these terms... But this has not been the case. ...

Someday, of course, this will come to an end. Perhaps Asian real currency values will rise sharply as a result of a burst of inflation in Asia. Perhaps the dollar will collapse and there will be a burst of inflation in the US as the Federal Reserve Board decides that temporarily abandoning its price-level peg is a lesser evil than the unemployment fallout that will result from a dollar collapse and interest rate spike.

A government that buys political risk insurance by placing an ever-growing stock of reserve assets in dollar securities guards against some dangers. But ... US Treasury and high-grade corporate bonds ... that US politicians are comfortable having foreigners own ... are not well hedged against inflation.... Prudent foreign government and private investors would find some way to diversify.

But how? Buying other countries' bonds would mean abandoning the goal of keeping real currency values low against the dollar. Buying up whole enterprises triggers angry speeches in the US Congress. What are needed are intermediary organizations that will grant a measure of control to foreigners, allow diversification across a wider range of US-located assets, and yet still appear 100 percent American to US politicians.

Enter the Blackstone Group.

China's $3 billion investment in Blackstone, while insignificant relative to China's $1.3 trillion in reserve assets -- a sum ... likely to hit $2 trillion sometime in 2009 -- is but a toe dipped in the water, a test run. At the start..., China will have small and indirect ownership stakes in a great many US enterprises, and the odds are that the usual objections will be absent. China will gain a measure of risk diversification ... and avoid running into political trouble. ...

Some observers think that the US political backlash against foreigners "buying up America" is what will bring the current configuration of global imbalances to an end. Deals like China's investment in Blackstone postpone that backlash, but not for long: $3 billion is equivalent to what China accumulates in reserve in less than three working days.

The question following China's Blackstone investment is this: How far can this process go? And how much control will US investors ultimately realize they have given up?

[Discussion of related issues at: "The Right Way to Respond to China's Exploding Surpluses."]

    Posted by on Monday, June 4, 2007 at 12:12 AM in Economics, International Finance, International Trade, Politics | Permalink  TrackBack (0)  Comments (31)


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