Paulson fails to melt Chinese hearts

Time was, when there was a problem of any size in the global economy, the countries affected would send their finance ministers running to Washington to get help from the two big Washington-based financial institutions, the World Bank and the IMF. No longer. Today, it is US Treasury Secretary Hank Paulson whose country is in deep, deep trouble. And he’s gone cap-in-hand to the only place that can throw a lifeline to him (and all the rest of us in the western world): Beijing.
Paulson’s mission has not, thus far, been going very well.
This is a huge, truly world-defining story. I don’t know why the WaPo hasn’t given it a lot more prominence.
The Daily Telegraph‘s Malcolm Moore reports from Shanghai today that Lou Jiwei, the chairman and chief executive of China’s biggest sovereign wealth fund, the $200 billion China Investment Corporation, said that China

had no intention of “saving” the West from the financial crisis. “Right now we do not have the courage to invest in financial institutions because we do not know what problems they may have,” said Mr Lou.

Slightly more diplomatically, China Daily headlined the same story “CIC head not keen on fresh acquisitions.”
The DT’s Moore noted that the disastrous fate the investments the CIC made earlier in Blackstone, Morgan Stanley, and Barclays Bank appeared to have blunted Lou’s enthusiasm for further investment in even stable-looking investments in the west. CIC has lost nearly 80% of the $3 billion it put into Blackstone in June 2007.
Moore wrote that Lou said,

that the panicky pace of rule changes by Western regulators also gave him cause for concern. “The policies of the developed nations on these financial institutions are not clear. Until they are clear, I don’t dare to invest in them. What if they go bust? I will lose everything,” he said.
He also underlined China’s determination to look elsewhere for its investments. “We don’t want to look at only the advanced or developing countries, we also want to look at emerging markets.”
Mr Lou also repeated the Communist Party line that China will concentrate on getting its own house in order. “China can only save herself because the scale of China is still rather small,” he said, adding that China’s economy is not yet strong enough to have a significant effect on the global economy. “If China can do a good job domestically, that is the best thing it can do for the world,” he said.
China has also put together a £373bn bail-out package for its domestic economy and will ramp up spending on enormous public infrastructure projects in order to boost consumption in the countryside.

In today’s official meeting, Paulson has also reportedly run into some trouble in his bid to persuade his Chinese hosts to open up their own domestic banking sector to investments from western banks. That strikes me as pretty good sense from China’s perspective, since its existing regulations on this score have provided it some vital insulation from contagion by the implosion of the western finance system. (Though of course it’s been affected by the collapse of the global “real” economy, as all countries have been.)
VOA’s Stephanie Ho reported that Paulson got what looked like quite a dressing down from his host in Beijing, Vice-Premier Wang Qishan..
Here’s what Ho wrote:

China’s chief trade envoy has urged the United States to, in his words, “do all it can” to stabilize its economy, amid a global financial crisis.
Chinese Vice Premier Wang Qishan opened the two-day Strategic Economic Dialogue by calling for the United States to stabilize its own economy.
Wang also urged Washington to protect Chinese investments in the United States.
The Chinese vice premier said China is willing to work with the United States on the most pressing issue – coping with the global financial turmoil…

Here’s the Xinhua/China View version of the story. It makes clear that Wang placed the emphasis, regarding what China could do to help resolve the global economic crisis, on things it could do to shore up and help develop its own economy– though he also made a point of noting the need to minimize the crisis’s impact on “developing countries.”
This story (no byline) says that Wang said that China,

took several measures to keep a stable and relatively fast growth of economy, such as a pro-active fiscal policy, a moderately easy monetary policy, stimulation of domestic demand and transformation of economic development ways.
“This is an important contribution to the stable development of world economy and finance,” Wang said.
The vice premier called on the U.S. side to go all-out to stabilize economy and financial market, and ensure the safety of China’s assets and investment in the United States.
He also urged the two sides to strengthen cooperation in financial supervision and the reform of international financial institutions.

That last sentence is quite interesting. Yesterday’s WaPo had a well researched article (buried deep within the Business section) by David Cho and Ariana Eunjung Cha that looked at various developments in the US-China economic relationship.
They noted that,

Among the various proposals [currently being considered in Washington] are for China to take a greater role in the International Monetary Fund. With its enormous foreign reserves — at $1.9 trillion, the largest in the world — China could buy power in a global organization that has long been criticized for being dominated by Western nations.
China has chosen to go another way. It has led a push to create a separate, Asia-only fund that would issue loans and offer other assistance to countries in need. China and its neighbors have committed $80 billion to the effort, and there have been discussions about increasing the initial size of the fund to $150 billion.
The proposed Asia Fund goes far further than previous regional initiatives and in certain cases could replace IMF assistance.

They also note– quite correctly– that many low-income nations in Asia and elsewhere became quite angry with the IMF during the 1990s, judging that IMF emergency loans came loaded with far too many conditions that favored the US and western nations.
Cho and Cha also note that Obama’s future Treasury Secretary, Timothy Geithner, “has had a strong interest in China since boyhood, when his father served as an Asia expert for the Ford Foundation. Geithner studied Chinese at Dartmouth University and spent at least one summer in China.”
… Anyway, the world is changing, very rapidly indeed. The Chinese now hold around $600 billion of US government debt, as well as a reported $400 billion investment in Freddie and Fannie, in addition to the large holdings (loans and equity stakes) they have in private US businesses. Whether they feel ready for it or not, they are already very significant players on the global economic– and also, largely by derivation from that– political scene. The collapse of the western financial system may have brought about this shift in the worldwide balance of power quite a lot faster than China’s Communist Party leaders expected or even, really, hoped for. How ready are they to start exercising the kinds of global leadership or co-leadership functions that will be required?
In one respect, we can clearly say they are not ready. That is, they are not ready at all– or probably, even willing– to assume the mantle of “world policeman” that the US has assumed to such a great extent since the fall of the Soviet Union. This is for a number of reasons, including that the CCP has always felt it wants to emerge onto the global scene through explicitly peaceful means rather than through military buildups and confrontation… and also, possibly coincidentally (or perhaps not), military power has come increasingly over the past 20 years to reveal itself as ineffective or even counter-productive as a generator of international muscle.
But the world does require some sort of (network of) security arrangements. We no longer have the “discipline” of the global Cold War; and the model of US Uberpowerdom is proving itself incredibly counter-productive. The task of “imagining”, in a joint, collaborative way, and then implementing a new much more collaborative set of security arrangements for the world is one of the big challenges of the coming years. And there are plenty of excellent building blocks to bring to the task…
In other dimensions of international leadership, China does seem much more prepared and capable. I was strongly struck to note, in Kishore Mahbubani’s excellent book The New Asian Hemisphere the many examples he gave of China’s having pursued a very smart diplomacy with numerous other governments near and far– including its “generosity” to its Asian neighbors during the 1997-98 financial crisis– and the encouraging account he gave of how the leadership-regeneration system within the CCP has evolved to the point that China’s been able to escape the gerontocratic system that afflicts so many other countries.
Anyway, let’s watch for further decisions on global economic issues that come out of Beijing. They are at least as important as anything that comes out of Washington, Brussels, or London.