Is China a Citibank? - The Honest Truth By Ajit Dayal
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19 MARCH 2009

The China story is remarkable by any standards. A communist country which rebuked the idea of private ownership and limited the freedom of the individual has managed to achieve an economic miracle. China is now one of the largest owners of US Dollars in the world. The USA and the US Dollar, of course, are the symbols of private ownership and freedom.

Ask any suppressed person living in any part of the world where they would like to live and what currency they would wish to own.
The response is likely to be: USA and US Dollar.

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Well, China has a lot of the currency and, if the space that China occupies in the US media is an indicator of how much China owns of the USA, then China does own a fair bit of the US.

Prime Minister Wen Jiabao, at an interview after the annual meeting of China's Parliament, expressed concerns that the US policy makers would ensure that the US dollar was stable. The US needed to ensure the safety of China's estimated USD 1,000,000,000,000 of investment in US dollar denominated investments.

"We have lent a huge amount of money to the United States," Wen said at a press briefing in Beijing on March 13th, "I request the U.S. to maintain its good credit, to honour its promises and to guarantee the safety of China's assets."

Strange - this coming from a country that is under fire for not honouring the human right to freedom. China is also under fire for adding pollution to the global world. Not to mention the fact that many Made-in-China products are of suspect quality and have broken the trust that people had when they go shopping for things like milk powder to toys to drywalls used in constructing homes.

So is Prime Minister Wen's finger-wagging a sign of China's strength or a show of China's weakness?

A Citibank?
Citibank was one of the world's largest banks. Like any ambitious global bank, Citibank made sure that its products were available everywhere around the world. It offered a range of products and services. It had products for the ultra high net worth, for the high net worth, for the middle class, and for the masses with lower incomes. It also had products designed for companies. And, like a good shipping and logistics company, it also owned the delivery mechanisms (like exchanges and software companies) that made everything possible.

Like their ads proudly proclaimed: the Citi never sleeps.

In the US, Citibank had tens of thousands of "producers" who sold home loans to many who could not afford to repay them. These loans were sub-prime and, in this economic downturn, cannot be serviced or repaid. Citibank now has billions of dollars of losses on its books from such loans. While the manufacturers of Citibank were happily producing products and selling them on to people who could never rely afford them, the risk control guys in the receivables section of Citibank sleeping on their job. They never asked the question: hey, will these guys ever be able to repay our loans?

So doesn't China sound like a Citibank?

China manufactured all sorts of products for all income levels and shipped them across to thankful customers - mostly in the US. The factories in China were humming away and the producers were happy. As was the government. Jobs were being created and the sales were piling up.

But, just as no one in Citibank cared whether the customers would ever be able to repay their loans, no one in China really cared whether the hordes of US Dollar bills they were accumulating were really worth anything.

Until now, that is. Prime Minister Wen is from the receivables department. He wants to makes sure that - rightfully so - China gets cash in real money, not in some worthless monopoly money.

But who is in trouble now: the guys who Citibank gave the money to or Citibank itself? Sure, the guys who took all that money and assumed it was never to be repaid are going through pain. Citibank is fighting for survival.

And Citibank is looking for a bail out. Sorry, a few bailouts.
As is China.

Hailing China
But who will bail China out? Its one trillion dollar investment in US government-backed paper is at risk. If it begins to sell its investments in the market place, it will cause massive erosion in the value of the balance US Dollars that it owns. Not only have the factories shut down and created higher unemployment but what they earned in the past will have vaporised. Not a happy situation to be in.

So China is a Citibank and needed its own bail out package from the US.
And it just got one.
On March 18th the Fed announced that they would be willing to buy USD 300 billion of US government securities from the market.
These will end up being Chinese owned paper that will find its way back to the US government.
China will get cash.
And use that cash to buy gold, commodity mines, wheat, and guns.

The finger wagging of the bill collectors department has reaped its reward.
The media hype and awe of China has reaped its reward.

While in India, we are still wagging our little finger at Pakistan for the terrorist attacks of November 2008.
That is, if anyone cares to recall that we did have these attacks.
And to make matters worse there is no one left in Pakistan to wag the little finger at.
Unless of course we know where bin Laden is.

Note: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt Ltd and Quantum Asset Management Company Pvt Ltd.. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited.


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1 Responses to "Is China a Citibank?"

munish

Jun 18, 2009

quite a wake up call, how the super powers are doing their economics and financials. nice study case

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