The bailout and China: The potential impact extends well beyond U.S. borders
One week after Lehman Brother's demise sent markets at home and abroad tumbling, there's more to worry about: the House of Representatives' rejection of the would-be monumental bailout of the American financial industry. Monday's no vote came dealt a serious blow to the legislation, which President Bush says is needed to prevent a "painful and lasting" economic downturn and "send a strong signal" of confidence to U.S. markets and restore stability to the global economy.
The political elite are pulling out all the stops to revive talks on the stalled bailout plan, which is aimed at preventing a possible collapse in the U.S. financial system — an event that would cause a severe domino effect that would threaten China's growth progress and the entire global economic landscape.
The initial failure of the financial rescue package, formally known as the Emergency Economic Stabilization Act, has left markets reeling from Wall Street to Tokyo and initially caused oil prices to fall steeply amid fears of a global recession. The Dow Jones Industrial Average lost 7% of its volume and plunged a record 777 points Monday, its steepest single-day drop on record. Japan's Nikkei average slid 4.1% Tuesday hitting a three-year low, while Hong Kong's Hang Seng opened down 5.5% and Taiwan's leading index closed down 3.6% (after briefly falling more than 6%) following the bailout plan defeat. (Mainland China's markets are closed this week for the National Day holiday, so the affect of the news on the Shanghai exchange won't be known until next week.)
The United States and China are the world's largest debtors and creditors, respectively. The two nations rely heavily on each other. While the Chinese government has accumulated huge foreign currency reserves (mostly U.S. dollars), the United States has a federal deficit of $9 trillion. China, which holds about $1 trillion of American debt, would be seriously affected by an American depression, since the resulting inflation would likely further drive down the value of the dollar, making it scarcely worth the paper it is printed on.
Economists in China have longed voiced concerns about the long-term outlook for the dollar (given its steady slide), and the proposed bailout would add another $700 billion in debt that could further negatively impact the currency's value, at least in the shorter term. While seemingly far-fetched, should China decide to unload its holdings of U.S. government debt, the consequences are unpredictable and the repercussions of such a move could be economically devastating.
Even if the U.S. Congress passes the bailout legislation, China could still suffer in the long run. Why? Chinese exports to the United States are crucial to its economic growth and the bailout package will not help penny-pinching American consumers who are losing their jobs and homes, and are spending a growing chunk of their income on "must-haves," such as food and gas (thus foregoing the non-essential purchases that the Chinese specialize in). Nor will it address the loss of all-too-important liquidity that has occurred in global financial markets. This liquidity, which makes it possible for businesses to borrow cash at affordable rates to fund expansion and growth, is key to many Chinese companies’ existence in a highly-competitive marketplace.
When all is said and done, assuming the bailout becomes a reality, politicians in Washington will ultimately foot the bill and keep the economy running not by raising taxes or cutting spending, but by borrowing from the Chinese and other foreign investors.
The political elite are pulling out all the stops to revive talks on the stalled bailout plan, which is aimed at preventing a possible collapse in the U.S. financial system — an event that would cause a severe domino effect that would threaten China's growth progress and the entire global economic landscape.
The initial failure of the financial rescue package, formally known as the Emergency Economic Stabilization Act, has left markets reeling from Wall Street to Tokyo and initially caused oil prices to fall steeply amid fears of a global recession. The Dow Jones Industrial Average lost 7% of its volume and plunged a record 777 points Monday, its steepest single-day drop on record. Japan's Nikkei average slid 4.1% Tuesday hitting a three-year low, while Hong Kong's Hang Seng opened down 5.5% and Taiwan's leading index closed down 3.6% (after briefly falling more than 6%) following the bailout plan defeat. (Mainland China's markets are closed this week for the National Day holiday, so the affect of the news on the Shanghai exchange won't be known until next week.)
The United States and China are the world's largest debtors and creditors, respectively. The two nations rely heavily on each other. While the Chinese government has accumulated huge foreign currency reserves (mostly U.S. dollars), the United States has a federal deficit of $9 trillion. China, which holds about $1 trillion of American debt, would be seriously affected by an American depression, since the resulting inflation would likely further drive down the value of the dollar, making it scarcely worth the paper it is printed on.
Economists in China have longed voiced concerns about the long-term outlook for the dollar (given its steady slide), and the proposed bailout would add another $700 billion in debt that could further negatively impact the currency's value, at least in the shorter term. While seemingly far-fetched, should China decide to unload its holdings of U.S. government debt, the consequences are unpredictable and the repercussions of such a move could be economically devastating.
Even if the U.S. Congress passes the bailout legislation, China could still suffer in the long run. Why? Chinese exports to the United States are crucial to its economic growth and the bailout package will not help penny-pinching American consumers who are losing their jobs and homes, and are spending a growing chunk of their income on "must-haves," such as food and gas (thus foregoing the non-essential purchases that the Chinese specialize in). Nor will it address the loss of all-too-important liquidity that has occurred in global financial markets. This liquidity, which makes it possible for businesses to borrow cash at affordable rates to fund expansion and growth, is key to many Chinese companies’ existence in a highly-competitive marketplace.
When all is said and done, assuming the bailout becomes a reality, politicians in Washington will ultimately foot the bill and keep the economy running not by raising taxes or cutting spending, but by borrowing from the Chinese and other foreign investors.
About the Author
Shannon Roxborough previously worked as a global risk analyst, and lived in China for nearly two years.
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Oct 27 09:38pm
long-term outlook for the dollar should allow corto to those people in charge of stock market as provider in webster bank......
Oct 30 08:19pm
what will China replace the USD with.... GOLD!
(click a star)
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