Monday, October 20, 2008

Dear Hank, here's what China can do

Oct 20, 2008

By Leslie Fong
CHINA is willing to pump in more money to help mend the global financial system but wants in return meaningful participation in overhauling it, according to an encrypted e-mail from one of its top leaders that found its way, inexplicably, into my inbox.

I have no means of verifying the authenticity of this letter from China's Executive Vice-Premier Wang Qishan to his friend, United States Treasury Secretary Henry ('Hank') Paulson. It may well be a fanciful concoction. But its content is interesting nevertheless to warrant wide dissemination. So here it is:

Hi Hank,

Thank you for your phone call last week and for being so candid. I gave a report of what we discussed to the Politburo Standing Committee. They attach great importance to your plea for China to do more to help arrest the contagion and rebuild confidence.

They think you deserve an equally frank response. Hence this e-mail, which I will deny writing if ever it fell into the wrong hands.

First, let me say that your appeal both flatters and frightens us in Zhongnanhai. We are not sure we can do much. This is not false Chinese modesty. You know us well enough to realise that we won't promise what we cannot deliver. But lest you think we are already beating the drums of retreat, to use a Chinese expression, let me assure you we are not.

We agree it is not in our interest to see the world tip headlong into a deep recession. So much of our growth is dependent on exports, especially to you. You go down, we go down. Even as I write, one of our toy manufacturers has bitten the dust, sending 6,000 out of work.

No doubt we aim to be less dependent. Thus, we are taking steps to stimulate domestic demand to make up for the expected slump in our exports, a decline made worse by the really bad name that Chinese products are now stuck with as a result of the criminal stupidity of a few.

But getting Chinese consumers to spend more is a monumental task. Our lack of social safety nets drives families to save for health, education and old age. Don't forget, at least 740 million of our people, some 56 per cent, are poor peasants. They don't have the disposable income to buy Nike shoes. Indeed, the only option may be for the government to put money in their pockets so they can spend, spend, spend. We are studying this approach in earnest.

But all this will take time. So we still need Americans to buy our shoes, toys and so on, for as long as they can afford to. Believe me, we want to help you to help ourselves.

Another compelling reason we don't want to see the US economy suffer a fatal seizure is that we have invested too much in you. According to your own figures, China holds US$518.7 billion (S$766 billion) in marketable and non-marketable US bills, bonds and notes.

This make us your second largest foreign investor after Japan, which held US$593.4 billion. This is enough cause for us to feel alarmed by all this stomach-churning turbulence.

So, what can we do to help? I know everyone is casting covetous glances at our foreign reserves, variously estimated at US$1.8 trillion. I need to make two points in this regard.

First, there is Chinese blood, sweat and tears in every dollar or euro that we have accumulated. We cannot spend our reserves lightly even if we do not have to submit to a one-man-one vote.

No doubt your intelligence people would have told you that there is a fierce ongoing debate among our elite as to whether we should help bail you and the Europeans out. You will recall that our former premier, Comrade Zhu Rongji, was severely criticised for buying so much of your treasuries.

So we will have to win over our sceptics - the New Conservatives, the Left Confucianists and so on. They argue that our reserves should be spent on stocking up oil reserves and on building our infrastructure. With commodity prices having fallen so much, we will doubtless do some of that. But we have to convince our sceptics that sitting on our hands while markets sink is not an option.

My second point is that we are not the only ones flush with money. According to best estimates, Japan has US$1 trillion in reserves, Taiwan US$270 billion, South Korea US$243 billion, Singapore US$170 billion and Hong Kong US$158 billion.

So, rather than ask what China alone can do, might it not be better to ask what East Asia can do collectively?

Indeed, the South Koreans have been calling for just such an approach and want a summit next month to discuss it. Sure, there is self-interest here, for they are the most vulnerable among us. But the idea of collective, coordinated action does have its appeal. Who knows, it might lead to the formation of an Asian Monetary Fund, a proposal that the West shot down so arrogantly in the aftermath of the 1997 Asian Financial Crisis!

Whether we go it alone or in concert with others, the question is how best to use the money and what we should get in return. Let me assure you that we are not out for a pound of flesh. We just want some lasting good to come out of this.

First, there must be retribution after autumn - which is our way of saying the West, after investigating the genesis of this catastrophe, must inflict severe pain on all those found culpable, including those rating agencies and analysts with vested interests who contributed to the fiasco. This is what your voters want too.

Second, while we will consider buying more T-bills so you don't have to print so much money, we will also want to buy directly into some of your corporations. But before we do, we need a firm commitment that our commercially driven investments will not be blocked by spurious claims of threats to your interests. It's business, so spare us the cant.

Third, it is time you and the Europeans let us and other Asians have a say in international institutions - International Monetary Fund, World Bank, International Bank of Settlements, etc. And dare I say it, there is no reason why G-8 should not become G-10 or 11.

Last but not least, the key players in the global economy should meet urgently to review and, where necessary, rewrite the rules - whether on financial surveillance, cross-border flows or exchange rates - so that a new stable global system can rise from the ashes of this raging financial firestorm.

In other words, a new Bretton Woods. But this time, we will be happy to play host at the Fragrant Hill resort in Beijing's western suburbs. Come to think of it, Fragrant Hill sounds just as good as Bretton Woods.

Well, chew on all this, Hank, and give us your views. Meanwhile, you take care. I am sending over via diplomatic pouch some lingzhi. It should help you sleep better and calm your mind. In these stressful times, you need it, friend. Hell, we all do.

The writer, a former editor of The Straits Times, is Senior Executive Vice-President (Marketing) of Singapore Press Holdings.

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