China’s Blackstone Coup

When China National Offshore Oil Company tried to buy America’s UNOCAL two years ago, it set off a political firestorm in the United States. When Dubai Ports World bought Britain’s P&O Steam Navigation Company, the fact that P&O operated ports inside the US led to more controversy in America.

One would think that a country like the US, with a current account deficit of roughly $800 billion a year, would realize that such a yawning external gap is inevitably financed only by selling off assets, which means that foreigners with money acquire ownership and control of US-based businesses. But the US – or at least Congress and the media – doesn’t get it. Americans evidently hope for a world in which they can have feckless deficit-generating fiscal policies, a very low private savings rate, and a moderate rate of investment, all financed by foreign capital whose owners are happy to bear the risks yet have no control over their assets.

One might think that foreign investors would quake in terror at these terms and shy away from dollar-denominated assets. But this has not been the case. High oil prices have created huge export revenues for Middle Eastern governments, which still want to park their earnings in American assets. The same is true of Russia, whose oligarchs, as well as the huge state investment fund that finance minister Alexi Kudrin has created, also want to invest their oil revenues in the US.

As for Asia’s governments, with China in the lead, the US remains the importer of last resort. The key to their development strategy is to put migrants from the countryside to work making exports destined for the US market. They doubt that an alternative development strategy based on boosting domestic demand would succeed. Thus, the real values of their currencies must be kept low relative to the dollar, which means that their reserves now invested in the US must continue to grow.