At Arm's Length - Financial Commentary about Money, Investing, and How It Affects the Average Investor

At Arm's Length: 06.28.05

In the Meantime...China

I can't say that it wasn't fun watching the free market capitalist and, by default, the most vocally patriotic among us taking vein splitting umbrage with the possibility of a Chinese oil company buying Unocal. The unsolicited bid from the state-run business was unexpected and brought swift accusations of foul play from rival bidder Chevron. But should anyone have been surprised about the eventuality of the offer for a commodity of such obvious value to a country whose production is so commodity dependent?

In fact it was Chevron's ruffled feathers and its quick turn to Congress that will prove the most ironic. The growth of Chinese interest in American companies and property is reminiscent of the Japanese real estate grab of the eighties and frankly should have been easy to foresee. Although the similarities end there between the two Asian nations, the rumblings from American businesses will sound the same. Could the Chinese see for sale signs at the border?

The American appetite for foreign goods has given countries such as China fewer options and as a result, they have been forced to funnel all of that hard cash back into the US. One of the main differences between the Chevron pending deal and the CNOOC offer of $18.5 billion aside from the ostensible different in size is the Chinese offer to pay cash for the company.

One of the cards held in Chevron's hand is the right to call for a shareholder vote on its offer before considering the Chinese offer. Expect little to be done because we have yet to develop a policy governing such events.

China's presence on the world's economic stage is bound to have some repercussive effects on how we run our country. This is just the beginning. On 06.12.05, even before this deal was put on the table, I suggested that China's appearance was one of an empire on the way up. We may not like the straightforward march of this communist nation, but the effort to stop the advance has stumped the current administration.

Last Thursday's testimony before the Senate Finance Committee by the Federal Reserve Chairman Alan Greenspan and Treasury Secretary John W. Snow left the attendant senators less than enthusiastic about the lack of economic direction from the two agencies concerning China. They have problems of their own and are doing what they can to keep the economy moving in the right direction. And trying to do so without suggesting that we had been warned.

Greenspan has been encouraging the economy with quarter point increases in the short term overnight rate as the salve needed to achieve the desired growth which is required to keep things humming along here at home. But there is a rattle in our nation's bronchi that has been growing with each dip in the Treasury yields and the chairman does not have a good answer as to why.

John Snow, on the other hand has been much more vocal about China's continued link to the dollar, suggesting that the undervalued yuan should be allowed to float freely. The tentative "or else" talk of tariffs issued by the President was further muted when the deal to buy the Unocal hit the wires. Tough stances need economic backing and too tough a stance would be akin to biting the hand that feeds us.

Greenspan and his cronies will meet for two days this week to discuss further increases in interest rates. Quite a few people see this as the end of the tightening cycle that has kept the housing market nationally stable and regionally overheated, kept the American people spending with little regard to saving, and has produced a Treasury note that seems destined to meet the German bond at its recent bottom at 3%. They could be right.

Either way, Greenspan will appear before the banking committees of Congress for the last of his Humphrey-Hawkins speeches in July, a semi-annual visit that was once mandatory but still proves to be one of the best formats for elected officials to question this highly revered banker. Expect his explanation of that decision to come under much more aggressive fire as he heads toward a January retirement. In other words, expect the quarter point increase.

Snow is trying to avoid questions about why there has been no development of a coherent policy towards China. And with good reason. Without one, the United States can continue to avoid taking a firm stand on all fronts involving China. Without a policy, the U.S. can continue to talk with the Chinese about impending Asian crises such as North Korea's armament while at the same time they can continue to don the shop worn guise of the sole economic super power.

China has turned itself into a global opportunist targeting areas that have been ignored by the Bush administration. Their first goal has been creating an economic advantage through customer development. Using its growing cash surpluses, the Chinese have stepped up their presence in Africa even as we have stepped away.

It is important to note that this is not a new policy for China. Since the advent of the Cold War, China has targeted countries in Africa that were generally ignored by the U.S. and Soviet Union.

The United States took a huge economic gamble in the Middle East. By arguing that the liberation of Iraq would stabilize the world via the Middle East oil reserves, we have committed a huge chunk of our available resources to an effort that is now beginning to feel futile. This miscue has allowed the Chinese to move into Africa with what appears to be an altruistic attempt to drag the continent into the twenty-first century. Rob Crilly in a special to USAToday pointed out that the Chinese seem to have a distinct advantage over their western counterparts because of their somewhat unconscionable approach to business. Human rights and publicity have little effect on the Chinese decisions to move into a country, many of which the United states has glaringly backed away from supporting.

While forgiving debt is a good first move to help the struggling continent, the United States has fallen consistently short of promises made through the Millennium Challenge Corporation as well. Jeffrey D. Sachs author of "The End of Poverty" put a dollar amount on that aid shortfall recently. He suggested that the US had given a total of one dollar in aid per African over the past year.

There is no immediate solution to the corner we have so obviously painted ourselves into both internationally and here at home. Greenspan has enabled this situation and now is trying to disable the very recovery he engineered. John Snow is trapped between too many bad policies tossed haphazardly in front of the American people seemingly all at once. Social Security and additional tax cuts with the ongoing war in Iraq have all presented an insurmountable obstacle for the President's message of tough talk on this emerging economic giant - especially when further borrowing would have been the only way to finance those programs.

In the meantime, China will march forward. That is until we decide to say no to trade deficits, no to increased budget deficits, and no to the belief that all of this debt will somehow just pay for itself.

The previous week's articles.

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