Toxic Asset, Tainted Milk
By Nazery Khalid
17 October,
2008
Countercurrents.org
The financial bust-up in the US emanating from the sub-prime and housing market crises and the tainted milk scandal in China seem like two events a country mile apart. However, upon closer inspection, they underscore the interrelatedness between the two economies which are a lot more binding than it appears. While the two sorry episodes exposed the follies of two of the most powerful nations on earth, they also provide a fascinating study on globalization and the inextricable links and growing dependence between the two economic juggernauts on one other.
Prior to these scandals, many analysts spoke of the ‘decoupling’ factor between the US economy and an increasingly robust and assertive Chinese economy, and confidently predicted that China would not feel much impact of any economic crisis in the US, and vice versa. However, such pronouncements have diminished as quickly as the fall of some of the giant financial institutions on Wall Street and the rapid recall of banned milk-tainted China-made products in recent weeks. Proponents of the ‘decoupling’ theory banked on China’s growing economic confidence and gradually waning dependence of the US economy. However, they did not see it coming : despite China’s very public efforts to reduce its reliance on Wall Street - such as increasing its Euro reserves – the Middle Kingdom is still very much influenced by the ups and downs of the US economy.
The reaction in China to the US crisis and the response in the US to the tainted milk issue suggest that the pronouncements of the ‘decoupling’ of the two giant economies are a tad premature. Far from being increasingly independent off one another, the financial meltdown and the milk crisis provide undisputable evidence that the two economies are so intertwined that they are exposed to the contagion effect emanating from the scandals. The indelible effects of globalization – in the context of the trans-boundary nature of capital flow and the widespread movements of goods - can be seen in the way the domino effects of the calamity in Wall Street triggered anxiety in China and the milk scare in China resulted in sharp rebuke and strong preventive measures by US regulators.
The shockwave of the financial trauma in the US felt by China must be seen in the context of the large amount of trade between them. Trade between the two has grown spectacularly over the last two decades, from a mere US$5 billion in 1980 to a whopping US$387 billion in 2007. Today, China is the third largest destination for US exports and its largest source of import, despite various prickly issues dogging the trade relation between the two economic behemoths. Underlining the close relationship between the two economic powerhouses, both have entered into talks to advance the Strategic Economic Dialogue between them to further boost bilateral trade. Such an effort could only lead to more trade and stronger economic ties between the two nations, hence increasing their economic interdependence on one another.
As it stands, bilateral trade between the two is heavily tilted in favor of China, with US incurring a trade deficit of US$256 billion, compared to US$2.8 billion in 1987. US trade deficit with China consisted of 28.6% of its entire trade deficit of US$896 billion in 2007. Growing US imports from China is largely attributed to the shift in production activities from traditional American sources of imports such as Japan, Hong Kong and Taiwan to China which offers comparatively cheap labor and low production cost.
As a result of the booming trade between the two countries, shipping services between the two have increased in tandem to facilitate their trade with each other, much of which is carried via seaborne transport. A landmark bilateral shipping agreement signed between the US and China in 1988 paved the way for more shipping services between them. With the agreement, American shipping companies are allowed to open representative offices in China and vice versa, and US shipping companies started feeder services outside China’s ports.
China’s Central Bank is the second largest holder of US Treasury securities, which technically makes it an underwriter of US debts. This technically means that China, for large parts, has a significant role in fuelling American appetite for cheap loan. This partly explains why China, in the wake of the US financial tsunami, has not luxuriated in gloating over the superiority of its ‘socialist market economy’ over the greed-is-good capitalism model so strenuously advocated by the US. Through its holding of US Treasury securities, China has even been said to contribute to the US financial crisis by inadvertently fuelling American consumers’ addiction on cheap credit. It is therefore in China’s interest to see a solvent and healthy US financial system to protect China’s investment in American-issued financial products.
As a measure of China’s growing financial clout, it rejected the call by US Treasury Secretary Henry Paulson to liberalize its capital markets. Given the financial mess in the US, China would not take kindly being lectured by someone under whose watch the biggest financial scandal since the Great Depression occurred. China would point to its gradual liberalization of its financial markets since it gained admission into the World Trade Organization in 2001 which include allowing foreign banks to establish a presence in China and dropping its currency’s peg to the US Dollar. Emboldened by the Wall Street meltdown, proponents of a gradual opening up of Chinese markets would be even more encouraged to adapt an ever more cautious approach towards liberalization rather than administering the free and open market treatment favored by the US.
Another indication of the cast-iron ties between US and China is the huge foreign direct investment (FDI) between the two. The US invested US$3.1 billion in China in 2005, making it the fifth largest source of utilized FDI in the country. Despite China’s dazzling economic ascent and growing economic strength, it is still very much a developing country which depends a lot on FDI to power its economic growth. In return, China also invests a significant amount in the US by way of its holding of US Treasury securities and products. In the wake of the US financial crisis, it can be expected that Chinese investment in the US will extend beyond financial products. Look out for Chinese capital – state of private – to invest in companies and properties in the US whose prices have hit rock-bottom and could present attractive investment potential.
Crying over spilled milk
In the wake of the tainted milk revelation in China, the US Food and Drug Administration (USFDA) has taken efforts to put Chinese made milk-based products under strict inspection to prevent the contamination to spread in the US. Although the US may not directly buy products manufactured by Sanlu – the company at the center of the ‘formula fiasco’ – it imports a myriad of food items from Asia which contain dairy-based items from China. As a precaution, the USFDA has added the popular Chinese-made candy, White Rabbit, to its list of items that require stringent examination at its ports of entry.
This latest scandal involving Chinese-made food items comes hot on the heel of the discovery of contaminated pet food imported from China last year. The crisis killed and sickened thousands of cats and dogs in the US and severely dented China’s credibility as a food manufacturing and exporting country. One could imagine the repercussion on Chinese imports should the contamination spread to other types of food products.
Such scandals could cause widespread loss of confidence among US consumers and could have an adverse effect on American demand for Chinese imports. The events did little to dispel the stereotype of US consumers of China being a country known for fake goods and products made with little regard for safety features. Should China fail to rebound from the latest food contamination scandal, its export of food items and food-based ingredients will suffer, and the confidence crisis will spook importers worldwide from buying other Chinese-made products. Shipment of goods from China to the US would be affected and would cause maritime trade between them and throughput volumes at their ports to drop. The food scare has come at a time when US imports from China appear to be slowing, growing only 1.8% in the first three months of 2008 over the same period in 2007.
Overcoming strains, strengthening ties
The Chinese word for ‘threat’ also contains the word which means ‘opportunity’. True to the saying ‘there is a silver lining in every cloud’, the ‘mess in the US’ presents a mouth-watering opportunity for China to invest in US companies. With China awash with the world’s largest foreign exchange reserve, it can be expected that Chinese entities such as CITIC and the state investment arm, China Investment Corporation will make white knight type of raids on troubled US institutions which are desperate for cash injection to stay solvent. Such a move would be welcome relief for the cash-strapped US financial system and the anxious taxpayers, and restore global confidence in a financial system which is ‘too big to fail’.
Such reactions to the ‘money and milk scandals’ would provide a glowing example of how the two economies could cooperate with each other - instead of agitating one another as they frequently do. China and the US could very easily rebound from the PR disasters and take corrective measures befitting of their clout and power to restore the confidence of markets, investors and consumers worldwide affected by the crises. The two influential countries should own up to their missteps by admitting and addressing the inherent weaknesses in their systems and going on an offensive to bring back global confidence to their markets and products. They should use their collective economic might to put in place a more solid, transparent financial and consumer market structures that could not only lead to better ties between them but to win back the hearts of the global community shaken by the toxic assets and tainted milk scandals.
The financial
foul-up on Wall Street and China’s milk misfortune – different
in nature but same in the manner that both were propelled by greed,
carelessness and thoughtlessness – should be a wakeup call for
the US and China to own up to their wayward ways. Time is ripe for
the two world leaders to stand up and be counted and mend their mistakes
to restore confidence and provide leadership to a world dependent
on their financial market and products. So much interests ride on
the individual economic wellbeing of US and China and on strong economic
ties between the two powerhouses. It is imperative that they act quickly
and resolutely to put their houses in order and work on fortifying
their economic bond.
Nazery
Khalid is a Senior Research Fellow at Maritime Institute
of Malaysia’s (MIMA), a think-tank that conducts maritime policy
research for the Malaysian Government and the industry. The thrust
of his center’s research is in the field of maritime economics,
with a focus on ports, shipping, multimodal transport, freight logistics,
offshore oil and gas, maritime supply chain, and maritime trade issues.Nazery
has presented talks and papers at many international conferences on
a wide range of maritime issues. His research findings and views on
various maritime issues and developments are often quoted in the media
and have appeared in various publications and journals. Nazery holds
a Bachelor of Arts degree in Business Administration from Ottawa University,
Kansas, USA and an MBA from International Islamic University, Malaysia.
www.mima.gov.my
