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July 14, 2009
There is a lot anti-China feeling circulating in Australia at the moment. These arise from the arrest of Rio Tinto's executive Stern Hu and others over the recent iron ore trade negotiations, in which an aggressive Rio has endeavoured to keep this year's iron ore contract price cuts to 33 per cent. The allegations are that the four Rio Tinto employees paid for detailed government trade and manufacturing data to give Rio Tinto executives an edge in iron ore negotiations with Chinese state-controlled steelmakers.
Michael Stutchbury in his column in The Australian:
Humiliated by rejection, Chinese state security has locked up one of Australia's top iron ore negotiators in its cells for the alleged theft of state secrets and taken possession of the computer hard drives from Rio Tinto's Shanghai offices. And it has refused to indulge in reasonable dialogue with the Rudd government over the matter. Talk about many ways to skin a cat!
Stutchbury's column is entitled Magic dragon grows into menacing bully even though China frames resource security in national security terms. China takes its resource security seriously and Chinese firms have encountered difficulties when trying to take large stakes in Western oil and mining companies.
Rowan Callick observes that China's arrest of Rio Tinto executive Stern Hu for stealing state secrets:
amounts to a strategic throw of the dice. Beijing is upping the stakes in its relationships with Australia and with the broader industrialised world. It is confident that the ball is in its court, that it is becoming the prime actor not only in the economic world but increasingly in the diplomatic world, too.
China and India are quickly becoming the world's new economic powerhouses and China’s state has a de facto monopoly on most of China’s outward investment for national security reasons.
Though China’s economy may have expanded over the last year ---China almost certainly produced a bigger stimulus program than any other major economy---that expansion clearly hasn’t fed through into more Chinese demand for US, European or Japanese goods. It is only in commodities, where Chinese demand — and Chinese stockpiling — has had an impact. However, China is the only country amongst those that relied heavily on exports for growth (Japan, Germany etc) to have avoided large economic downturns. China has reflated its domestic economy as world demand slowed.
China has the upper hand, given the increasing concern about the sustainability of the United States’ large external current account deficit. The globalization of finance which resulted in a world where the poor financed the rich, not one where the rich financed the poor. This “financing" flow was essentially a government flow. Despite the talk of the triumph of private markets over the state a few years back, the capital flow that defined the world’s true financial architecture over the past several years was the result of the enormous accumulation of foreign exchange reserves in the hands of the central banks of key Asian and oil-exporting economies, especially China.
China is now the largest of the U.S. creditors and its willingness to absorb U.S. Treasurys could be key to the success of the U.S. fiscal stimulus and banking sector rescues. China is worried that the US will deal with its unsustainable fiscal path via inflation and debasement of the value of the dollar via depreciation. Consequently, China is flexing its muscles on the question of the global reserve currency system dominated by the dollar.
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Nouriel Roubini in his The Almighty Renminbi? in the New York Times says:
He says that decline of the dollar might take more than a decade. This means that:
The US dollar would be replaced by the Chinese renminbi. This could eventually become a means of payment in trade and a unit of account in pricing imports and exports, as well as a store of value for wealth by international investors.