The World's Financial Geography Is Changing
Michel Morkos Al Hayat - 14/04/08//
It was not surprising that the developing countries' GPD constituted 41 percent of the world GDP (59 trillion dollars) in 2006, compared with 36 percent in 2000 (according to the World Bank Development Indicators 2008 Report, issued on April 11, www.worldbank.org). The share was expected to have neared 50 percent by the end of last year, given the growth rate increase in developing countries and its decline in advanced ones.
According to the report and based on new standards that take into account price level differences among countries, China has become the world's second largest economy, whereas five developing countries are among the 12 largest economies worldwide. According to Kishore Mahbubani in his book "The New Asian Hemisphere: The Irresistible Shift of Global Power to the East," this change has become inevitable. For the political and economic attraction towards the East is a change faster and larger than most Western policy-makers can understand, as he says.
Almost a decade ago, the Far East, Latin America and Russia changed course. A record growth was achieved for hundreds of millions of Chinese and Indians coming out of misery and unemployment. However, everyone knew that Asia only manufactures, while the West consumes. Then, a huge imbalance struck the trade balance between the two regions. Yet, no one perceived the huge financial power Asia has become; the more it works, the richer it becomes. The world realized that the Chinese Central Bank is amassing foreign currency reserves, which reached more than 1650 billion dollars (China News, March 26, 2008). Since these reserves are used to buy US bonds, the phenomenon remained abstract. However, the subprime mortgage crisis revealed to what extent the world's financial geography has changed.
By becoming the second largest global economic pole, right after the US, according to the World Bank's new standards, China moved ahead of Germany, which was thought to be firmly rooted in second place. This country, which benefited eight years ago from World Bank aids, has become, as of last December, one of 45 donor countries for the world's poorest countries.
The mortgage crisis revealed a new fact about the world's financial geography. As of December 19, 2007, many features changed when the Chinese State fund (China Investment Corp.) gave 5 billion dollars to the US Morgan Stanley Bank, which fell under heavy losses linked to the subprime mortgage crisis. Paradoxically, "Communist" money is saving one of the most skillful money institutions on Wall Street. The issue did not end at Morgan Stanley: Singapore money saved Merrill Lynch and UBS; Chinese money floated Bear Stearns; and billions of dollars flowed from Abu Dhabi's sovereign fund to City Group's treasury. The signs of this new Asian financial power are best highlighted, as four Chinese enterprises are among the top ten biggest companies on the global stock markets in terms of market capitalization, with PetroChina, the first among these four, being valued at 724 billion dollars, ahead of the US ExxonMobil (519 billion dollars) and General Electric (377 billions, prior to the losses it incurred a few days ago).
From a moral perspective, this is shocking. How can the developing countries come to the rescue of the North? Yet, in direct money transfers, Northern countries seem more giving. In 2006, the industrialized countries received 857 billion dollars in direct investments and exported 1022 billions. On the other hand, the developing countries received 379 billion dollars and invested 174 billion dollars. However, it is indirect investments that crawl deeper in global economy courses. Developing countries' money formed the most important balance factor in global trade balances. The phenomenal G7 trade balance deficit stood at 842 billion dollars in 2006 in the US alone and 750 billions in 2007. This deficit is being funded by the trade surplus registered in China (of 220 billion dollars in 2007) as well as in the oil-rich countries though in the past it used to achieve its balance with the advanced countries. China has been investing for years now in US Treasury Bonds. In other words, China has been funding an important part of the huge deficit of the world's largest economic power, investing any reserve left in the capitals of foreign institutions. Hence the creation of the Chinese sovereign fund, which bought 10 percent of Plaxton, one of the most important investment funds in the US. Thus, the Chinese save and the Americans borrow. China in turn jostles with the advanced countries for investments in Africa as a means to secure a safe access to the abundant resources of raw material there.
In parallel, the West depended heavily on its "solid" banking system. It was proud of it or controlled, through this system, the rest of the world, especially Asia. In 1990, the Westerners taught the Japanese lessons in order to cleanse banks after the real estate and stock market bubble. At the end, they were alarmed by the fragile financial and banking structure in China. Yet, the largest banks in the world crumbled with some being saved by Chinese money. The Western banks are expected now to reveal their total losses in 100 days, as per G7 demands in the Spring meetings.
The last symbol of the shift in financial power from the West to Asia lies in Beijing. It plays the world's financial leg now. It has the power to decide upon the equality between the two world currencies: the dollar and the Euro. The Governor of the Chinese Central Bank is capable, in a single word, of destroying the dollar, should he decide to convert a large part of the Bank's reserve into Euros, without any objection from Washington or Frankfurt.
Have poor countries become banks for the world? The prospected growth of Asian reserves, the stacking of petrodollars in Gulf countries and Russia, and the early settlement of Argentinean and Brazilian all leave us with the impression that developing countries are funding the industrialized countries.
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