from Follow the Money

Worrying about debt to China

July 6, 2005

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Jesse Eisinger has a nice Long and Short column exploring CNOOC’s bid for Unocal in the Wall Street Journal.

I liked this quote from Lehman’s Ethan Harris:

The Cnooc bid "strikes people that we really are mortgaging our future, when in reality we are anyway ... either way (buying treasury bonds or buying companies) we are giving away part of our national wealth. But when they buy a company, the symbolism is more tangible."

And this one from Paul Kasriel:

"Well, now they are (Communist) when they want to buy our companies. They are OK when they want to buy our debt."

I am also quoted in column.

One small point of clarification -- China is running a substantial global trade surplus, right noz about 5 billion dollars a month.

Because China’s trade surges in the summer and fall in anticipation of the holiday season (retailers have to build inventory), that monthly surplus should increase over the course of the year, even with oil at 60. Jonathan Anderson of UBS expects monthly trade surpluses of 10 billion dollars or so later in the year. But that trade surplus alone is not enough to generate 20 billion dollars a month in reserve accumulation -- or, more broadly, 20 billion dollars a month to buy foreign assets of various kinds, since from a balance of payments point of view, buying Unocal substitutes for buying reserve assets. China’s current reserve accumulation reflects not just its still growing trade and current account surpluses, but also capital inflows. Some of those inflows take the form of inward FDI heading to China, others inflows stem from hot money betting on renminbi revaluation.

Consequently, it is fair to say that China financed the purchase of Unocal out of its trade surplus. But it equally could be said -- given that China is attracting 60 or 70 billion dollars of FDI a year -- that in some broad sense the purchase of Unocal is an asset swap. China gets Unocal, and in particular its Asian gas fields and in exchange US and other firms get manufacturing facilities in China. Rather than using the dollars associated with inward FDI flows to purchaser even more Treasuries and Agencies for China’s reserves, in some sense CNOOC plans to draw on the broad pool of dollars coming into China to purchase a US firm.

Don’t expect anything more from me this week though! I intend to return to my mini-break/ vacation. And since I am working from an internet cafe, links are rather hard to put in.

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