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When China Moves, the World Economy Fluctuates

Posted August. 23, 2010 08:30,   


The world economy is rocking and rolling as China emerges as a global superpower, surpassing Japan in size and controlling global assets.

While the U.S. is struggling amid the economic slowdown, China is purchasing Korean and Japanese government bonds and increasing gold reserves and M&As of resource-related foreign companies. With all foreign investors moving toward China, Beijing has increased its influence over the global asset market.

○ China emerges as bond interest rates and gold prices fluctuate

China influences all sectors ranging from government bonds, gold, natural resource-related companies and high-end art works to real estate. A major change is China’s purchasing spree of Japanese and Korean government bonds while selling U.S. Treasury bonds.

Amid rising foreign demand for Korean government bonds due to Korea’s fast economic recovery, China is increasing its share of Korean bonds, dropping the bond yield. Though the Bank of Korea raised its benchmark interest rate last month, the market interest rate is dropping and leading to decoupling.

The five-year Korean government bond yield fell 0.11 percentage point to 4.13 percent Friday, the lowest level of the year.

Certain analysts say the recently strong yen is due to China’s purchase of Japanese government bonds. A high yen hampers Japanese exports and as China buys Japanese bonds, the high yen is maintained in deepening Japanese policymakers’ worries.

The gold reserve, which is considered a safe asset since the global financial crisis erupted, is also going into China’s pockets. According to the World Gold Council, China had just 395 tons in gold reserves in the first quarter of 2000 but this figure rose three-fold as of the first quarter of this year to 1,054 tons.

Some say the recent increase in the price of gold is due to China’s gold buying spree.

China is more aggressive in M&As of foreign resource companies. As of the third quarter of this year, its share of M&As in materials and energy increased from nine percent in 2005 to 22 percent this year. China’s share of the trading of high-end art pieces soared from seven percent in 2008 to 17 percent over a year.

Lee Won-seon, director of investment analysis at Taurus Investment Securities, said, “We hear news that luxury art pieces are auctioned off at high prices as Chinese auction companies are recently doing well.”

Overseas properties are no exception. The Wall Street Journal, citing an anonymous source, said Aug. 4 that China Investment Corp. is negotiating to buy Harvard University’s share of a U.S. real estate fund for 500 million dollars. China sees that now is the best time to purchase U.S. properties since commercial real estate prices are dropping sharply.

○ Yuan’s independence from the dollar

Experts say China’s move is aimed at diversifying assets not only to distribute risks but also to check the U.S., its economic rival. In other words, this is Beijing`s ace against Washington, whose relationship with the Middle Kingdom has moved back and forth between tension and cooperation.

The U.S. has pressured China by urging the yuan’s appreciation and complaining of unfair trade.

Jeong Yeong-shik, a research fellow at Samsung Economic Research Institute, said, “Considering that news on the diversification of China’s foreign reserves pop up every time the U.S. comes under public pressure, the diversification is not just about distributing risks but also an issue that can be interpreted in a political context.”

Others say the yuan`s globalization is a “declaration of independence” of China since it intends to continue global transactions stably despite the liquidity crisis by expanding the areas for conducting transactions with the yuan, not the dollar.

The People`s Bank of China said Tuesday that it allows foreign financial investors including foreign central banks to invest in its government bond market as part of its effort to globalize the yuan. In this case, financial companies or export-import companies that deal with China can reinvest in the Chinese bond market with the yuan they received as trade settlements, increasing liquidity in international capital transactions.

In addition, Beijing has made aggressive swap deals with foreign central banks. Heo Jae-hwan, a researcher at Daewoo Securities, said, “China’s growing currency swap deals with Singapore, even if it is not in a financial crisis, show that it will not rely on dollar liquidity in the future.”