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China, Citi and Alwaleed make brave new world

China, Citi and Alwaleed make brave new world

Leave it to Citigroup Inc. to settle the raging debate about the true might of China’s economy. The debate was prompted by a recent World Bank report claiming the world’s No. 4 economy is far smaller than believed. The new calculation, based on purchasing power parity, found that China produces 40% less output than previous estimates.

The largest US bank is proving wealth speaks louder than statistics. Citigroup may be turning to the cash-rich Chinese government for a handout, joining other household names such as Morgan Stanley.

It would be the latest sign China is, according to Joseph Quinlan, chief market strategist at Banc of America Capital Management Llc.— “America’s Financial Sugar Daddy." First came its $3 billion (Rs11,790 crore) investment in Blackstone Group LP, one of the most capitalist of Wall Street vehicles. Now, “Communist" China is routinely bailing out the masters of the financial universe.

China is hardly Wall Street’s only saviour. Singapore’s state-run Temasek Holdings Pte tossed a $5 billion life preserver at Merrill Lynch and Co. Inc. And now, after a $7.5 billion investment from Abu Dhabi Investment Authority, Citigroup may be getting a cash infusion from China and Saudi Prince Alwaleed bin Talal.

Three bubbles

On the surface, all this back-scratching makes sense. Asian and Gulf governments, with their currency reserves and oil wealth, face a kind of embarrassment of riches and are open to buying into Wall Street at fire-sale prices. In the West, subprime mortgage losses have drained the capital Citigroup and others keep as a cushion against bad loans.

Yet, such transactions of convenience are joining together three of the world’s biggest bubbles—China’s economy, oil prices and Wall Street’s hubris. The Chinese bubble that gets the most attention is stocks. The CSI 300 Index climbed 162% last year, even as officials took steps to calm the market. In 2007, the names of three Chinese banks and the word “stocks" beat “sex" to become four of the most Googled words in China. Another bubble is a stockpile of currency reserves that is approaching the equivalent of Brazil’s annual gross domestic product. Economists are wondering about bubble troubles elsewhere. Officials are so worried about inflation that they’re freezing price increases of oil products, natural gas and electricity.

Oil prices near $100 per barrel seem emblematic of the surge in commodities. Prices for everything from grain to gold to zinc are being driven higher by the rise of China, India and other developing powers and speculation in markets. While the commodities boom is crimping global growth, its proceeds are enriching resource-rich nations.

Alwaleed’s consumption patterns say it all. He’s buying his own Airbus SAS A380 superjumbo jet for personal use. That $319 million purchase in being financed by a lack of energy conservation and efficiency around the globe. That’s just fine by Gulf states rolling in petrodollars and using them to extend their global reach. And then there’s Wall Street’s hubris bubble. While it’s manifested itself in myriad ways over the decades, the most recent incarnation is among the most disturbing. Banks sold risky loans to Americans least equipped to understand or handle them. Then Wall Street systematically packaged that risk in ways that hid the dangers. Even as things unravelled, experts lined up to say the turmoil would be “contained." As if.

Whether serendipitous or by design, the connecting of these three bubbles raises the stakes for the global financial system. Here’s but one example: If China overheats or its stocks plunge, Wall Street shares could take a hit as investors bet on an end to bailouts from corporate China. Or if Wall Street’s hubris resulted in even more bad loans, China’s stocks could take a hit as investors mull the fallout for Asia’s No. 2 economy.

The intermingling of a Wall Street on the ropes, a China on the verge of overheating and obscene oil wealth is creating a brave new world of finance. Indeed, the thrust of Aldous Huxley’s Brave New World dovetails nicely with what’s unfolding in global markets at the moment.

Huxley wasn’t thinking about Wall Street when he wrote his 1932 novel. Yet, the motto of the utopian world Huxley created—“community, identity, stability" isn’t all that unlike what people from Federal Reserve chairperson Ben Bernanke to Citigroup chief executive Vikram Pandit to Chinese President Hu Jintao are trying to achieve.

Brave new world

Bernanke and Pandit are interested in the stability of the global financial community. While Hu shares that goal, he’s also interested in creating a more global identity. This is China’s moment, not only to spread its “soft power" but also its influence over the global economy’s biggest players. A bigger say in the International Monetary Fund is one thing; pieces of Citigroup and others are nice to have, too. As the world’s bubbles intersect, the challenges of the global system arguably become more complex. It will be interesting to watch them coexist, feed off and perhaps even reinforce each other in the months ahead—or frightening.

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