The Gold Standard  

In the investment/analyst community, China has been in the news since Jim Chanos – famous for shorting Enron. It was quoted widely since he said that China was Dubai * 1000. You can see his comments here and here. I too think that was somewhat wild although one could understand the ‘sound byte’ angle to that comparison. As some one pointed out, China can print money and Dubai cannot. The blurring of lines between personal, public and private interests is the common element although one should think that it would be sharper and more widely prevalent in the monarchies of the Gulf region. Jim Rogers – a famous China bull – refuted him. See here.

Tom Friedman joined this debate. He said that China was not the next Enron, pointing to Mr. Chanos’ success with Enron. You can read his NYT Op-ed piece here. His main argument was this:

But it also has a political class focused on addressing its real problems, as well as a mountain of savings with which to do so (unlike us).

Soon after he wrote that, came the Google announcement. In case you missed their original announcement, it is here. Friedman was embarrassed. He wrote a clarification in which he split China into two parts: ‘command China’ and a ‘networked China’. He conceded that if Command China dominated ‘Networked China’, he would short the Communist Party of China! That was some finessing and the finer point (if any) was lost on many readers, including Yours Truly. See his column here.

Abe Greenwald takes issues with Mr. Friedman’s flip-flop. But, he fails to rebut him convincingly on the key issue that – rightly or wrongly – Mr. Friedman identifies as the key differentiator in favour of China – a political class focused on addressing its real problems. See his comments here.

I sided with Tom Friedman in a sense, on their economic competence in my MINT column last week. See the full column here. I had also alluded to their insecurity and obsession with control as the key risks that could trip or trick them into committing errors. An insecure (and fearful of losing control) mind plays games, you see. That too was on display in their reaction to Google’s threat as the Chinese finally lost their cool and saw the US government hand in Google’s decision. See how the Chinese media reacted. Usually, they are seen as HMV.

In the final analysis, I do not think we are anywhere closer to the truth with respect to divining China’s true economic health than we were, before these articles appeared. Therefore, I would stick to my view that their economic management remains on track to take their economy slowly (without major convulsions) towards a domestic orientation.

But, make no mistake. This move by the Greek government (through its advisers) to seek Chinese funding of its debt gives China a huge advantage over Europe and the rest of the World too. This is a classic understatement:

Chinese thinking is that Brussels could not let Greece fail, because the implications for the euro’s credibility are too dire. If that line of argument prevails in Beijing, then China may well be a buyer of Greek bonds. In the process, the Chinese may well be buying invaluable political capital in Brussels as well. [More here]

Just one argument would make it clearer: if China’s investment in Greek debt allowed the country to avoid a default and a potentially destabilizing crisis in the Eurozone, how would the Eurozone would be able to influence Chinese monetary or exchange rate policy when US dollar weakness results in excessive EUR appreciation? In addition, China has another reason to ensure that the EUR does not implode. One is that is a EUR implosion would rob China of an alternative currency to the US dollar to diversify its reserves. Collapse of the EUR against the US dollar would indirectly cause a significant appreciation of the Chinese currency against EUR, further stymieing China’s export prospects.

All told, I think this move is the soccer equivalent of China 10 – EU 0 (or) RoW 0.

Look at this news-item in FT: ‘China scientists lead world in research growth’. It was front-page news in FT Asia Edition on Monday and, on Wednesday, it was about Greece queuing up to China for money. India would do rather well to take note of the three factors cited as the key for China’s success in scientific research:

According to James Wilsdon, science policy director at the Royal Society in London, three main factors are driving Chinese research. First is the government’s enormous investment, with funding increases far above the rate of inflation, at all levels of the system from schools to postgraduate research. Second is the organised flow of knowledge from basic science to commercial applications. Third is the efficient and flexible way in which China is tapping the expertise of its extensive scientific diaspora in North America and Europe, tempting back mid-career scientists with deals that allow them to spend part of the year working in the west and part in China.

Together with this news and this news, one has to concede that after the Google saga, China still holds the aces. In fact, it has emerged stronger.