US Financial Crisis/Bailout, China's Role

I think the motivation behind these short term actions is that the dam is about to burst and something needs to be done to stop it from happening _now_. There won't be a future Armageddon to worry about if the one standing in your face is not addressed. Yes the deficit spending will hurt in the long run, but it, at least, has a chance to give enough time for the deeper structural changes. If the measures are not taken now, things will fall apart before the changes can be implemented. At least that is what I think their reasoning is.

A very readable and down-to-earth explanation of the AIG debacle, though, with lots of anger, foul language, and a dash of class struggle, be warned!



If you want to skip the alarmist introduction and get to the explanation, it starts in part I: PATIENT ZERO (page 2).

RedMercury said:

I think the motivation behind these short term actions is that the dam is about to burst and something needs to be done to stop it from happening _now_. There won't be a future Armageddon to worry about if the one standing in your face is not addressed. Yes the deficit spending will hurt in the long run, but it, at least, has a chance to give enough time for the deeper structural changes. If the measures are not taken now, things will fall apart before the changes can be implemented. At least that is what I think their reasoning is.

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The news feeds I'm getting suggest that currency traders are assuming that the US dollar will be debased as the Fed soaks up the Treasuries. In other words, the money that comes up to buy the Treasuries is from the printing presses.

There appears already some valuation movement going on and recently the US dollar has lost the most value this week since December.

Why Supplanting the Dollar Would Be Good for America

By JUSTIN FOX Thursday, Apr. 09, 2009

New column: Down with the dollar! And up with the SDR! (Up with Esperanto, too, while we’re at it)
Or maybe not. In the past few weeks, another rival to the dollar — created in 1969 but dormant for most of the time since — has made a spectacular re-entry onto the world scene. It goes by the ungainly name of special drawing right (SDR), and it is the currency not of some foreign rival but of the Washington-based and traditionally U.S.-dominated International Monetary Fund (IMF). It isn't even really its own currency, since it derives its value from a "basket" that contains dollars, euros, yen and pounds. (See 25 people to blame for the financial crisis.)

But it sure has become popular. In late March, the head of China's central bank made headlines by arguing that the time had come for the SDR to supplant the dollar as the world's "supersovereign reserve currency." A few days later, a U.N. task force recommended the same thing. Then U.S. Treasury Secretary Tim Geithner endorsed giving SDRs a bigger role. After the dollar fell in currency markets in reaction, Geithner backpedaled. But at the G-20 meeting in London, President Barack Obama joined the assembled heads of state in agreeing to a nearly tenfold, $250 billion increase in the amount of SDRs available to be lent out. (Read "China Takes a Small Step Away from the Dollar.")

SDRs were created to supplement the Bretton Woods currency regime, which was built around a dollar linked to gold. After President Richard Nixon decoupled the dollar from gold in 1971 and allowed it to float freely in currency markets, the subsequent dollar crash led to talk of establishing the SDR as global reserve currency. That faded when the high interest rates set by Federal Reserve Chairman Paul Volcker to throttle inflation lured foreigners back to the dollar in the early 1980s.

Since then, we've had an international monetary system in which the dollar is the main store of value. When countries want to protect themselves from the vagaries of global financial markets, they stockpile dollars the way nations in previous eras hoarded gold. This stockpiling has enabled the U.S. government to borrow almost without limit in global markets and until recently allowed American consumers to do the same.

Over the short term, this can seem like a positive; we can get away with running a federal deficit that could hit $2 trillion this year only because of the dollar's status as global reserve currency. But borrowing trillions isn't really a ticket to long-run prosperity. In fact, the current economic crisis may have been spawned by huge imbalances in global trade and capital flows that are in part the product of the dollar's special status. Global demand for dollars supplanted demand for U.S. products and services, argues Columbia University economist and longtime SDR fan Joseph Stiglitz, resulting in trade deficits, the decline of U.S. manufacturing — and years of supereasy mortgage credit. (Read "Is the Almighty Dollar Doomed?")

Shift those foreign dollar reserves into SDRs, the reasoning goes, and global finance suddenly becomes much more balanced. By no longer needing to load up on dollars, countries like China would have less incentive to run big trade surpluses with the U.S. This line of thought goes back to English economist John Maynard Keynes — the source of seemingly every important economic idea of this crisis-racked time — who first proposed what he called "supernational bank money" in 1930. During the economic turmoil of his day, he kept refining the idea and proposing odd names for the currency — first "grammor" and then "bancor." (He rejected a colleague's suggestion of "moy.")

Keynes led the British delegation to the 1944 conference in Bretton Woods, N.H., where Allied officials determined the postwar shape of the global financial system. He was unable to persuade his U.S. counterparts to give the institution at the heart of the new system, the IMF, the money-creation powers he envisioned. Those finally came in 1969 with the development of the SDR but remained limited in scope. No new SDRs have been created since 1981, and there are only 21.4 billion of them (equal in value to $31.9 billion).

The G-20 decision to create $250 billion in new SDRs marks a "major step" toward establishing the SDR as a global reserve currency, says Stiglitz. It's only a step, albeit enough of one to prompt Republican Representative Michele Bachmann of Minnesota to make the claim that Obama was out to ditch the dollar. Actually, the dollar would live on in an SDR-dominated world. It would no longer reign supreme, but neither would the yen or the euro or the yuan. Which might be the best long-run outcome the U.S. can hope for.



See also: The Dangers of Printing Money
The Fed's doing it. The Bank of England says it plans to do it, too. With printing money (or as they say today, "quantitative easing") back in fashion, TIME reflects on Germany's efforts in the 1920s — and the crisis that followed.

that still wont resolve america's real debt problems though. in the end they'll still have to resort to inflation no matter what. like the germans, the US cant afford to repay their debt at the current rate. so massive inflation is almost inevitable in the long run.

pla101prc said:

that still wont resolve america's real debt problems though. in the end they'll still have to resort to inflation no matter what. like the germans, the US cant afford to repay their debt at the current rate. so massive inflation is almost inevitable in the long run.

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:china::china::china:
In order to deal with the depreciation of U.S. dollars, Chinese governments are doing their best right now to make the RMB convertible. So, in the future, if U.S. dollar loses its purchasing power, the U.S. governments will have to pay more for the monies (plus interests) they borrow from China.

Serious warning signs happening on the US dollar.

Parts of articles posted. Click links for the rest.

Dollar's wounds reopen
By W Joseph Stroupe



"Emerging market indexes and commodities are surging as investor wealth pours in once again. Profligate US spending and skyrocketing deficits, hyper-loose monetary policies in this crisis, and collapsing confidence that the Fed will actually be able to withdraw such policies and excess liquidity when required, are all causing dollar inflation expectations to become deeply rooted in investor psychology.

The overpowering perception on the part of global investors that the Fed, Treasury and Administration are losing control of the US fiscal position, and that inflation (more likely hyper-inflation) is virtually becoming inevitable is threatening to wreak irreversible harm upon US finances and upon the dollar itself.

Angela Merkel, the German chancellor, issued on June 2 a stern warning along these very lines, a warning that was remarkable for its stark honesty and its unprecedented violation of the cardinal rule of German politics that says German politicians never comment on monetary policy of the central bank. Her break with that rule indicates Berlin is extremely concerned about the dangerous and risky hyper-inflationary and currency-debasing monetary policies being undertaken in this crisis. Chancellor Merkel launched her attack on the US Federal Reserve, the Bank of England and on the European Central Bank. She said:

What other central banks have been doing must stop now. I am very skeptical about the extent of the Fed's actions and the way the Bank of England has carved its own little line in Europe.

Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds. We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years' time.

On June 3, Fed chairman Ben Bernanke himself issued a warning that long-term deficits threaten the very financial stability of the US. He further said:

In recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen ... These increases appear to reflect concerns about large federal deficits ...

He went on to somewhat minimize the role of investor concern regarding US spending, seeking to lay the record steepening of the bond yield curve off on other factors. It seems that Fed officials don't want to see the full and stark truth about how global investors are rapidly losing confidence in the US fiscal position and in the dollar. "


US moves into back seat
By W Joseph Stroupe




"The resilience of emerging-market economies, particularly China, is helping drive a strong rebound in crude-oil prices to north of US$66 a barrel, as well as big gains in other commodity prices. That in turn has fueled a rally in many US energy and materials stocks. Some also see emerging-market strength helping battered consumer companies.

If you just focus on the US demand as many tend to do, then it is hard to justify the nearly doubling of oil prices in the past months," says Paul Ting, president of Paul Ting Energy Vision LLC. But the news out of China helps explain the move. Crude-oil imports to China were 13.6% higher in April than in the same month last year, and 2.3% higher than March's daily import level."

I posted this in the other thread. I say SDRs is the way to go.


China discovers value in the IMF
By Peter Lee

China has long been at odds with the International Monetary Fund, not least over its Western domination and harsh prescriptions for countries that come to the fund cap in hand. Now Beijing sees the institution as offering an escape route for its own problem - how to get rid of its US dollars

China's fraught relations with the International Monetary Fund are driven by two conflicting agendas - the country's effort to gain unimpeded access to resources in the developing world on bilateral terms, and its interest in using the IMF's facilities as a international organization to issue Special Drawing Rights (SDR) assets to help Beijing diversify away from the US dollar.

At the same time, the West is trying to incorporate China, Brazil, Russia and India, the "BRIC" countries, into the IMF system and thereby assert the continued relevance of Western financial institutions and leadership in the midst of the worst crisis since the modern international regime was created after World War II.

There is a growing sense of urgency behind China's engagement

with the IMF as America's enormous recession-fighting budget deficit causes US bond yields to creep up.

The world is starting to share Beijing's publicized anxiety about inflation eroding the value of the dollar and is beginning to think about the unthinkable - a future in which the US dollar is gradually stripped of its historical role as the international currency and something else, maybe the SDR, replaces it.

The potential exists for an important evolution in the function of the IMF - if the Barack Obama administration can keep its eye on the ball and overcome Republican opposition.

The International Monetary Fund and the People's Republic of China do not make for an easy fit. In fact, it's hard to think of two institutions further apart in philosophy and practice than the IMF and the PRC.

In Asia, China's continued economic success during and after the Asian financial crisis of 1997-98 is an open rebuke to the monetary and exchange rate policies promoted by the IMF as the solution to the region's ills.

In the southern hemisphere, China has sold itself as anti-IMF, providing needed investment to ostracized regimes without onerous calls for reform. Now, the global financial system has experienced a major failure triggered by abuses in the developed countries that once used the IMF as their monetary and financial lawgiver to the developing world, and the BRIC countries are being called upon to help save the IMF's bacon.

China cares enough about the world financial system not to let it go down the tubes and is willing to support the IMF in its role as bailout provider of last resort to the hapless European economies like Latvia and Iceland that followed the Wall Street pied piper to financial oblivion.

At the Group of 20 summit in London this spring, China pledged to pony up US$40 billion to do its part in a joint international effort to boost the IMF's lending capacity by $500 billion. But China's engagement with this fading relic of American financial dominance is cautious, equivocal and, it appears, somewhat self-serving.

The IMF and China have been going head-to-head in the developing world. The IMF and its sister project lending organization, the World Bank, have historically demanded conformity to Western requirements for transparency, deregulation, and denationalization - structural reforms - as a precondition for financial assistance. As long as the West was able to maintain a de facto monopoly on foreign assistance this approach won the acquiescence of the targeted states - if not happy economic results.

However, when the Chinese government offered an alternative - one that took the form of a bilateral negotiations between equal sovereign states - developing nations were eager to take it.

Bush misses Africa play
The story of how the George W Bush administration took its eye off the geopolitical ball and allowed the Chinese to steal an economic and diplomatic march in Africa is now the stuff of legend. The case of Angola - where China blew an Italian bidder for an oil concession out of the water with a pre-emptive $2 billion infrastructure credit - is cited as the world's wake-up call. Now Angola has eclipsed Saudi Arabia as China's largest supplier of oil.

China's success in Africa has compelled the IMF to do a little soul searching. Case in point: the revealingly named Exogenous Shocks Facility, intended to provide rapid assistance to developing countries crushed by the collapse in the international economy through no fault of their own.

The IMF also excited a flurry of enthusiasm when it announced that it would abandon the structural reform requirements that are the hallmark of its detested and counterproductive interference in local economies. However, it turned out that the structural reform requirements have only been waived for a select group of countries already meeting the IMF criteria, so that a round of paperwork can be eliminated.

It appears that the IMF is trying to work through the crisis as an isolated anomaly, not a sea change in the structure of the international economy and a power shift away from the United States and Europe model of open-market globalization to the rise of a network of Chinese-style, managed, bilateral and multilateral trading arrangements in goods and services.

The IMF has not endeared itself to Beijing as it has championed the interests of Western creditors, the US government, and American and European mining firms to pressure the government of the Democratic Republic of the Congo to renegotiate one of China's biggest overseas resources deals - a $9 billion infrastructure project for copper and cobalt transaction.

China's ambassador to the DRC angrily characterized the IMF's stance as "blackmail". Yu Yongding of the Chinese Academy of Sciences was undoubtedly reflecting internal official attitudes to the IMF when he spoke to China Daily in the run-up to the G-20 conference: "They [developed countries and pressure groups] have already targeted our wallets but we have many reasons to object," said Yu, a formal central bank advisor. "If we do so, it will seem like the poor is rescuing the rich, wouldn't it?"

He added that China's friends in the developing world have cautioned against giving loans to the IMF. "Even if you do decide to do so, the sum should not be big," Yu quoted them as saying.

Reuters also picked up on the story, describing a white paper critical of the IMF's coddling of rich states that the Chinese government circulated prior to the summit:
[The] section on the IMF touches a raw nerve because of China's belief that the Fund spends too much time lecturing developing countries on how to run their economies.

According to this line of thought, the Washington-based fund could have tempered the present crisis by sounding the alarm earlier and louder about the economic imbalances building up in rich countries, notably the United States, whose voting share gives it the power to veto the most important IMF decisions.

"The IMF should strengthen oversight over macroeconomic policies of all parties, particularly the major reserve currency economies, and provide oversight information and improvement recommendations to its members on a regular basis ... " the paper says.
Diplomats say China has still not forgiven the fund for introducing new currency surveillance rules in June 2007, at Washington's behest, that make it easier for it to determine whether a country is keeping its exchange rate fundamentally misaligned to boost exports. Beijing objected to the rulebook, regarding it as a US ploy to enlist the fund in its campaign for a stronger yuan.

Insurmountable bias
The Chinese consensus appears to be that the IMF's pro-Western bias is institutionalized and, for the time being, insurmountable. The key advantage of the developed countries resides in the fact that important decisions require an 85% vote.

The United States holds a 17% voting share, giving it a veto. Even if the US vote share dropped below 17%, the change would be more symbolic than real unless there was also a massive shift in voting rights away from US allies in Europe and Japan to the BRIC countries and the developing world.

Not surprisingly, China is already looking beyond the IMF to a new regional grouping to provide financial support to Asian economies.

On May 29, 2009, Forbes reported:
A key breakthrough came early this month when ASEAN plus three, [the Association of Southeast Asian Nations plus China, Japan and South Korea] ... finally agreed in Bali to create a US$120 billion regional reserve fund. The deal came after China and Japan, the two largest contributors to the fund, buried their hatchets and agreed to each fork out an equal sum, or 32% of the total needed to create the fund.

If the regional reserve fund succeeds, it would represent the first regional institution in Asia that is blessed with real financial power and with teeth to enforce discipline among members. But the hard part is only beginning, with negotiations to set up a multilateral surveillance institution now under way. The success, or the lack of it, will determine how far Asia will move towards regional integration. Hadi Soesastro, senior fellow of Jakarta-based Centre for Strategic And International Studies, said the new institution wasn't designed "to replace the IMF, but to supplement it."
Given this context, it is not surprising that China's engagement with the IMF is a matter of situational advantage, not enthusiastic endorsement. Nevertheless, Beijing's pursuit of its priorities might bring revolutionary changes to the IMF.

Beijing appears most interested in exploiting the IMF's desire for increased cash and continued relevance as a means of reducing China's exposure on the inflation-threatened US dollar.

US inflation is a major concern of the Chinese government. The US budget deficit in 2009 will reach an eye-popping 12.9% of gross domestic product. The IMF (irony alert) endorses a 3% cap for states with their financial house in order.

During US Treasury Secretary Geithner's recent visit to China, Yu Yongding took him to task, as Bloomberg tells us:
The US should take China's interests into consideration "so that your own interest can be protected," Yu said. "You should not try to inflate away your debt burden." China could still diversify some of its Treasury holdings into euros or commodities, Yu added.
"Yes, some people say the euro is very weak," Yu said. "Okay, weak is good, we'll buy very cheap."
The best outcome for China would still be to negotiate with the US and reach agreement on its Treasury holdings, Yu said. "The borrower should keep their promises," he added. "The US should be a responsible country."
China is, one would imagine, guardedly hopeful that the Barack



Obama administration will be able to fix the US economy, cut the deficit down to reasonable size, and get international trade (and Chinese exports) humming again.

But it also doesn't want to be under the US gun and be forced to buy Treasury bills to finance a yawning deficit simply because Beijing has no place else to put its money. So China is looking for options, and not just the euro threat that Yu wielded.

A roundtable of Chinese economists convened on the occasion of Treasury Secretary Geithner's visit this month expressed the majority view that holding US bonds was risky, and advised the careful, long-term diversification of dollar holdings into "tangible and strategic commodities," equities and bonds, and through overseas mergers and acquisitions.

In addition, China is pursuing several avenues for decreasing dollar exposure that involve utilizing and repurposing the primary supranational financial institution - the IMF. Somewhat opportunistically, China proposed that the IMF sell off 400 tons of gold in order to finance its operations. One of the main likely purchasers of that much gold would, of course, be China, which recently surpassed Switzerland as the world's fifth-largest holder of gold reserves.

Nudging IMF away from dollar
In a development of considerably more long-term significance, China is also trying to nudge the IMF into creating large-volume and liquid internationally tradable financial instruments that are not dollar-based.

China's stated interest in funding the IMF's emergency fund through a $40 billion bond purchase is bound up in the suddenly not-so-arcane issue of Special Drawing Rights. In March, the president of the People's Bank of China, Zhou Xiaochuan, proposed that the world should look at transitioning from the US dollar to the SDR as a reserve currency.

The SDR is a little-used fiat currency that the IMF is authorized to issue. It is based on a basket of currencies: at present, the US dollar accounts for 44%, the euro 34%, the British pound 11% and the Japanese yen 11%.

Since the SDR is a universally accepted international financial instrument whose value does not rely on solely on the dollar, the Chinese are interested in it as a chance to hedge, albeit partially, against a potentially tanking dollar.

Zhou invoked John Maynard Keynes, who proposed a supranational currency at the time of the Bretton Woods conference in 1944 as the most logical, multi-polar solution to international settlement of accounts. However, Mr Zhou probably derives his enthusiasm for the SDR from philanthropist George Soros and economist Joseph Stiglitz, enthusiastic cheerleaders for the SDR, rather than from a close reading of Mr Keynes.

Both Soros and Stiglitz consider the US dollar an inappropriate currency for the international settlement of accounts because of the vast deficits the US has been running.

Foreign governments with a surplus of dollars find that the only safe haven of any size is the US Treasury market, so that the world economy is, in effect, doing business in order to subsidize US deficit spending. Shifting toward a new international currency, such as the IMF's SDR, would tie currency creation to actual terms of trade instead of to the US deficit; the US government would be forced to live within its means; developing countries would invest their SDRs in development projects instead of Treasuries; and nirvana would ensue shortly.

China's floating of the SDR issue provoked a spasm of terror on America's far-right wing, which raised the specter of a new world currency supplanting the dollar inside the United States. Among mainstream economists, the general response has been that replacement of the dollar by the SDR in international settlements is "not gonna happen".

Despite professions of bafflement and scorn from Western economists, the prospect of SDR bonds has elicited strong interest from all the BRIC countries, especially Russia - an indication that people who actually run economies rather than simply talk about them find the SDRs a potentially valuable and significant development.

Indeed, the evolving relationship between the IMF, the SDR, and China offers some interesting wrinkles. The potential creation of SDRs is connected to the "New Arrangements to Borrow" (NAB) - the initiative announced at the Group of 20 summit to increase the IMF's ability to lend by $500 billion.

The NAB is designed to be pain- and cost-free: a pre-emptive show of financial force modeled on the guarantees the US government is providing to American financial institutions, in this case demonstrating that the IMF was backed by an additional $500 billion in commitments.

The purpose is to convince the financial markets that banks and markets in target countries are backed by ample resources from the IMF and are viable, so that credit will ease and lending resume - without the IMF (or its backers) having to actually disburse the cash.

The philosophy was recently put on display in Poland, which received a $20 billion commitment - not $20 billion - from the IMF as an expression of confidence in its reasonably healthy economy and financial sector.

The proposed $100 billion contribution to the NAB proposed by President Obama at the Group of 20 meeting isn't cash either - it's a credit line, to be drawn if and when the IMF needs it. Japan has already provided a similar $100 billion facility.

Cash - not credit
Interestingly, the BRIC countries aren't interested in offering a credit line, despite the seemingly attractive possibility that it might never be called on. They want to expend hard cash to lend money to the IMF today - by buying bonds - and get some of those diversified SDRs in return.

Surprisingly, the dominant force in the IMF - the Obama administration - does not appear hostile to the SDR.

Obama's economic brain, Office of Management and Budget director Peter Orszag, is a follower of Stiglitz. There are signs that the Obama administration accepts the idea that being able to fund US deficits through creation of international fiat currency creates a moral hazard, and that China's desire to move away from the dollar is understandable and, from a macroeconomic point of view, perhaps even desirable.

Whether the NAB facility and the coveted SDRS ever materialize will be decided by running the gauntlet of the US Congress. Unfortunately, the Obama administration seems to be recapitulating, rather disastrously, its missteps on the closing of Guantanamo.

The remaining $400 billion in support is contingent on the US coming up with its $100 million - just as, in the case of the Guantanamo closure, Europe was going to take Uyghur detainees if the US took a few.

The White House has not been able to frame or sell the IMF credit line very effectively. Domestic consensus building has largely been limited to the release of a letter from the Bretton Woods Association - albeit with an impressive bipartisan list of signatories including Henry Kissinger, Condoleezza Rice, Paul Volker, Brent Scowcroft, Colin Powell, and Robert Rubin - urging arrangement of the credit. [1]

Instead of simply defining the $100 billion as a credit, Orszag awkwardly characterized it for budget purposes as a low-risk swap of assets whose risk, if it took place, had a 5% risk of default, that is a budgetary cost of $5 billion. [2]

In order to speed approval of the credit line, the IMF credit line was tacked on to the Supplemental Appropriation for the Iraq and Afghan wars. The Senate passed the appropriation but House Republicans have seized on the issue - as they did the case of Guantanamo prisoners - as a way to defeat Obama both domestically and in the eyes of the international community.

It looks like the NAB issue will be misleadingly painted as a $100 billion giveaway to bail out Old Europe and a profanation of the sacred cause of funneling $98 billion to deserving troops and contractors without distracting amendments.

The White House's efforts to whip the bill through the House of Representatives are complicated by liberal anti-war and anti-IMF activists' attempt to add about 40 Democratic "no votes" to the Republicans' and defeat the Supplemental.

The Obama administration will have to decide if it is worth expending its political capital to fight for the rather remote and abstract imperative of a contingency fund for the IMF. If it doesn't, the entire refinancing of the IMF may go down the tubes.

For the purposes of China, the NAB will offer an interesting possibility if it goes ahead. If the credit was drawn down, the US would be holding IMF securities denominated in SDRs - which it could sell to China. Likewise for the Japanese $100 billion and, presumably, the other credit lines. And those proposed bonds will be denominated in SDRs also.

Half a billion dollars in SDR-denominated securities is not going to topple the US dollar from its throne as the world's reserve currency. But it would provide a significant haven for a chunk of China's US dollar reserves - now north of $1.5 trillion - if and when Beijing decides that it wants to decrease its exposure to the dollar.

And it would give China a compelling reason to support the survival of the IMF - and the continued creation of SDRs.


Asia Times Online :: China News, China Business News, Taiwan and Hong Kong News and Business.

/more_evidence_h.html?chan=globalbiz_asia+index+page_top+stories
t's Official: Beijing's 'Buy Chinese' Policy
Posted by: Dexter Roberts on June 17
More evidence has emerged that China intends to favor its own companies as it spends money to boost its economy, including through its $586 billion stimulus package. As I blogged last Friday, there is growing concern amongst foreign companies that Beijing has been quietly instructing local governments and ministries to ‘buy Chinese’ as they implement new infrastructure projects. This issue was raised during the June 8 BusinessWeek Global Green Business Forum in Tianjin.
Now as reported in today’s Financial Times, front page for maximum impact, nine of China’s ministries and government agencies have issued a directive that states much more clearly the imperative of buying Chinese goods whenever possible. “Except for engineering, goods, and services that cannot be obtained under reasonable business conditions within China, domestic products should be purchased for the government investment program,” the notice states.
The directive, which was issued May 26 and posted later on June 4 on the website of the powerful National Development and Reform Commission, is a joint statement by the NDRC itself and the legislative office of the State Council, as well as industry and information, housing, railways, water resources, supervision, transport, and commerce ministries. The edict even goes further and claims that to date there has been discrimination against local brands in purchasing by local governments, a practice that will no longer be allowed. Foreign companies, for their part, claim that much the opposite is true. The “untenable distinction between ‘domestic’ and ‘foreign’ in government procurement practices negatively impacts the sustained growth and development of the domestic economy,” the American Chamber of Commerce complained April 27.
For regular observers of China, the latest directive could provide a bit of mental whiplash. That’s because Beijing officials have recently been on the anti-protectionism warpath, speaking out loudly and often about what they see (and probably rightly so) as examples of protectionist tendencies abroad. China’s commerce minister Chen Deming (his ministry is one of those that are now pledging to buy Chinese products whenever possible) even penned an editorial on the topic that ran in the Wall Street Journal:
“History tells us that the more serious a crisis becomes, the more committed we must be to openness and cooperation. Regrettably, however, trade measures by the U.S. against China are on the rise. Recently, American industries have petitioned the U.S. government for antidumping investigations, and for investigations under the World Trade Organization’s ‘special safeguard provision,’ which could restrict imports of Chinese products. This will seriously test China-U.S. economic and trade relations,” Chen wrote in the piece that ran on April 27. Fair enough—many trade analysts do see these measures as examples of protectionism by the U.S.
But then the whiplash: the minister continues by suggesting that both countries should see business opportunities in their respective stimulus packages: “Both governments have rolled out economic stimulus packages on a massive scale, which in turn are expected to become new growth areas for our trade and investment cooperation. For example, China’s demand for infrastructure, machinery and equipment, and environmental protection is huge. It is hoped that both countries would turn these opportunities into tangible outcomes.” To state the obvious: successfully turning these opportunities into tangible outcomes sure isn’t going to be easy when Beijing’s top ministries are ordering localities to ‘buy Chinese.’

Its highly unlikely that the central government will impose direct regulations, it doesn’t go with their anti-protectionist rhetoric, they have plenty of other means to get the bureaucrats to favour domestic products though.