Deep in the bowels of the earth, in a huge open cast mine in Port Hedland, Western Australia, the distinct sound of a lilting Cork accent crackled through the tannoy.
A group of exhausted miners were sitting down after a shift in over 100 degrees desert heat, talking about a Chinese offer for the company, while the man from Ballincollig was directing traffic for the next shift of miners.
These mines are so huge that drivers of the enormous Komatsu trucks communicate with each other via a central base.
The coordinates of the trucks are then relayed to the miners to prevent them getting run over, because the cabins are so high off the ground that the drivers can’t see the miners below.
At the epicentre of this elaborate traffic system was this lad from Ballincollig.
He had been in Australia for a year – a typical casualty of the building downturn in Ireland.
We chatted and, after about ten minutes, found out that we had two friends in common – an Irish quirk that made the Aussie miners laugh.
I was making a documentary for ABC Australia and the section we were filming was about the influence of China and Chinese investment, particularly in Western Australia.
Many Australians we interviewed, like these miners, conceded that Australia was China’s quarry and, over time, the Chinese would buy up, not just the raw materials, but the companies themselves in order to secure supplies.
The Australian miners were worried about this prospect, not having any idea about what working for Chinese bosses would mean for them.
Ballincollig’s finest interjected and suggested that it would be only a matter of time before the Chinese were buying stuff in Europe and that we in Ireland should welcome this.
He said this would happen sooner than people expected.
Last week, his prediction was realised when it was revealed that the Chinese are big buyers of Spanish government debt. While this is not a surprise, the announcement focused attention on the growing influence of China as the world’s biggest investor.
It seems like only yesterday when people worried about so much western investment going to China to avail of the cheap labour and immense power of Chinese manufacturing.
The story then – in its most extreme interpretation – was that China would suck in so much western capital that the western economies would find themselves starved of cash to finance projects at home.
Now the opposite is happening. This reversal mirrors what happened in Germany after World War II.
After the war, capital initially flowed in to rebuild Germany and the country ran a significant current account deficit. But within a decade or so, Germany was rebuilt and it was exporting all over the world.
Today, China is similar.
What might have been a net importer of global capital has become the world’s largest – and now quite aggressive – investor. China holds $938 billion of US treasuries alone. It is by far the biggest owner of US bonds and yet it knows that these US assets will deflate in value as the dollar falls against the Chinese yuan.
If you want to see why the dollar will fall, just look at the Chinese current account surplus. In 1993,when the world worried that China would suck in capital, China ran a current account deficit of $11 billion.
By 2008,Chinawas running a surplus of $426 billion.
Last year, the surplus fell to $300 billion because the Chinese reacted to the global slowdown by fuelling its own domestic spending.
With a change in policy expected in China this year, as it tries to rein in demand and cool down the economy, the surplus will rise again.
The significance of this is that the surplus has to be spent abroad.
So where will it be spent?
Well, a significant amount will have to be spent in Europe, particularly in the bond markets.
This is where Ireland comes in.
Last week, the Chinese signalled that they are examining peripheral European bond markets. As traditional investors abandon the European bond markets, others – like China – will fill the void.
The Swiss National Bank decided last Month that it would not accept Irish government bonds as collateral.
This is an extraordinary decision, that a central bank of a European country will not accept the government bonds of a member of the euro. But it is a sign of just how precarious our position is.
As we fall down the respectability pecking order, the type of buyers of Irish government debt will change. They will no longer be blue chip outfits, they will be emerging market countries that might see their own experience mirrored now in Europe.
Brazil, for example, a country that is accustomed to its bonds being rejected by the blue chip parts of the financial industry, is now so successful that it will be another huge buyer of out-of-favour peripheral government bonds.
Brazil is the Latin American China, and it has experienced so much cash flowing into the country that it announced last Friday it would actively sell its own currency to prevent the real from rising.
This is yet another example of the changing global economy where the so called emerging markets have emerged and are now financing the rest of the world.
There is something unpleasant in the pattern that is unfolding whereby countries with billions of poor citizens are financing countries with millions of rich citizens.
Classical economics predicts that the opposite should happen. But as cash flows from the likes of China and Brazil to America and the periphery of Europe, we in Ireland will get used to the idea that countries like China will be significant investors here in the years ahead.
The events in the Spanish bond market last week confirm this trend.
Given that the EU and the IMF are strangling us with 5 per cent-plus interest rates on the money they are lending us, there is always an option to talk to the Chinese who have so much cash that they are prepared to accept certain devaluation of their investments in the US dollar simply to diversify their portfolio.
After all, the Chinese will definitely make a loss on their US Treasury holdings and if they are prepared to buy geopolitical influence so expensively, who are we to deny them a toehold in Europe?
We might well need them soon.
As the Australians have discovered, the game has now changed irrevocably.
Another thought inspiring article from our host. So what does Sovereignty mean to todays generation? Does it mean choosing which currency system owns the “Country”? What now indeed do we mean by a “Country”? Will mothers of the future seek to relocate to places owned by currency regimes which fit their ethos?
Will Collins be thought alongside Mao Zedung? Will we eventually carry a little green book extolling the virtues of Oriental ownership?
Changing times indeed with the prescience of Orwell now looking very inspired indeed.
China is only interested in extraction goods. Peat?
[…] This post was mentioned on Twitter by David McWilliams, Seamus O' Keeffe, Karl E. Pants and others. Karl E. Pants said: RT@davidmcw: Time for a Chinese #bailout? http://dlvr.it/D52LD […]
Great article. I think we should look further than the selling of Irish bonds to China. For example, San Francisco is one of the main import ports for Chinese goods into the USA. Cork could be developed as a distribution hub for Europe and the UK for certain Chinese imports. Direct inward investment could partner with some of those China factories in recent years suffering the malaise of product recall. Managerial and technical expertise from Ireland/Irish universities could locate some offshore Chinese factories in Ireland to share their knowledge and expertise. DmcW should continue his journey and travel on to… Read more »
Oh, forgot to mention. China lends/buys bonds only to help a country buy its goods. This is how the US economy has operated for a long time. Of course China’s purchase of US bonds also financed the wars in Afghanistan and Iraq, hence the huge national debt of “the world’s only remaining superpower.” A laughable boast, given the economic state of the US. On the other hand, when you owe someone a few thousand, he owns you. But when you owe a person billions/trillions you own him. He has to keep you alive, hoping that maybe just maybe you will… Read more »
Mary (Mammy) O’Rourke wants a little Chinatown in Athlone, at least it’s a start
This solves nothing and goes against what you’ve been saying all this time. This just simply means moving our debt from one body to another with the only difference being a better interest rate.
The whole issue is the tax payer taking on debt it shouldn’t be , not just the interest rate.
Unless your referring to looking to China AFTER we default from the bank debt?
Given the margins our European partners are charging ECB / IMF loan we should keep an eye on the big picture. Finance is the new form of warfare http://www.counterpunch.org/hudson10112010.html.The battlelines are being drawn and the prize is energy resources. China is way ahead with a planned strategy in acquisition through bilateral trade agreements around the world from Africa to S America to the new oil pipeline from Russia. Coal is vital and Australian imports which have grown as China depletes its own supplies has seen huge growth.China will not be at the mercy of markets and acquire the assets. In… Read more »
China has strengths and weaknesses. Strong economic growth (which my sources indicate masks massive underlining structural problems and a housing bust which is going to make the one here look like Lego land), buying up Western debt like no tomorrow (for which the US is putting the Chinese under pressure, a lot of that debt will be worthless and they may yet be left holding the baby), strong export sector (despite problems with quality control from time to time) but they also have massive internal problems. Huge population, massive income inequality, substantial unemployment, sizable illiterate peasant class, separatist movements in… Read more »
subscribe.
Let’s assume that just 1 percent of Irish people are really smart entrepreneurs; ie 45,000 people like Denis O’Brien, with the know-how to make things happen,. If China were to have the same ratio of really smart people, there would be 13 million of them, ie three times the total population of Ireland.
Perhaps they could spare a few thousand to sort this place out?
I disagree with the article. I think that we should instead be doing business with regimes that have cleaner records with respect to human rights, labour rights, market economics, and political representation. Doing business with Beijing tends to end up as a one way traffic – with Beijing becomming more powerful, and the manufacturing base of other countries being repeatedly hollowed out. This produces social disintegration, like we see now in states like Ohio and Michigan in the US. This has caused very serious problems. Therefore, I recommend boycotting goods from the PRC until there is political reform and democratization.… Read more »
Worlds Debtor Nations- Ireland 1305% versus China 5% This article triggers an issue that has been around for a while now. Perhaps I missed it but I don’t recall any mention being made of this analysis of the “Countries Overloaded with Debt” (October 2009) http://www.cnbc.com/id/33506526/Countries_Overloaded_With_Debt and the related slideshow on the “Worlds Biggest Debtor Nations.” http://www.cnbc.com/id/30308959?slide=1 Some will doubtless argue with the stats used but Ireland was number 1 in debt terms with an external debt (as % of GDP) at 1305% , yes that 1305% Another perhaps more interesting feature of this table is that most all the European… Read more »
Chinese puzzle:
Biffo and Seanie golf while Anglo burns! Question: Knaves or Fools?
If they discussed Quinn’s CFD possible €3bn losses on those bets, or Permo interbank loans, they were crony knaves. If they didn’t, they were fools!
Answer: They were both knaves and fools. QED.
“Classical economics predicts that the opposite should happen. But as cash flows from the likes of China and Brazil to America and the periphery of Europe, we in Ireland will get used to the idea that countries like China will be significant investors here in the years ahead.”
Just goes to show how nonsensical and utterly divorced from our current reality “classical economics” are.
David.
Excellent analysis on the ebb and flow of money through the veins of a sick disgusting rigged jailor economic plutocracy.
Have to agree with Deco, it has been too readily forgotten in the rush to praise Chinese wealth and power that the PRC has an appalling human rights record and we surely should acknowledge the huge qualitative difference between their rule and the political freedom enjoyed in western democracies, however flawed that may be. Small signs of improvement are encouraging but we should hold them at arms lenght until we see a great deal more.
David, not one of your best ones, have to agree with Deco. We give out when Umbro and other football kit manufacturers make massive mark-ups on child labour in India making footballs, so why are we burying our heads in the sand when we know the Tyrranical Chinese Government who possess billions of spare Euros from the backs of Chinese Sweatshop industries. Are we not concerned about the Chinaman who has to work 12hr shifts 7 days a week? China can easily be knocked down a peg or two by attempting to make their worker bees aware of their awful… Read more »
China’s FX Realities I agree with David that China’s FX reserve will be devaluated. In Q4/2010 alone their treasure chest was filled with a additional record 199 bln which brought it to $ 2,847 trillion in 2010 according to Peking Central Bank last week. When we are mapping the global capital markets, we see a capital flow into countries like Brasil, which they do not like and started to fight against of course. For a better understanding, It is necessary to understand global capital flows in context, and you may find some reports such as the Global Wealth Report by… Read more »
An interesting article David offering a solution which might help to fix the debt problem but there are some problems with it You are selling the Irish people the idea that there is no problem at all in accepting billions of investement from a country that denies freedom of speech to it’s people by locking down the internet and throwing pro democracy journalists in jail You fail to mention any of this so for me your aticle is not complete because I bet there are plenty of Irish people who would have issues with these points. Then again a lot… Read more »
David, Your creativity expands my own thinking all the time and for that I am grateful and thankful. In truth, I have my own doubts about why China would want to invest in Ireland?!? I come back to this question all the time, What is their real gain?!? I don’t have that answer and maybe I am being cynical, however, I am cautious too. I keep coming back to who gains? When my own marriage was breaking up, I was in Maynooth college at that time studing counselling, sociology, community development, family law etc etc and it was there that… Read more »
Just a reminder. China always wants something in return. What does Ireland have to offer? China wants ores and oil. And in some cases the ability to control/influence foreign policy. But Ireland is not high on the list of serious international influencers. Get your house in order. Look to Iceland or Norway, not to China. Why, in the 60s, were a family related to me the only Irish family operating a fully modernized farm on some of the richest land in Europe? The neighboring owners were all northern Europeans. Yes, my elatives were fortunate to be excluded from Irish politics,… Read more »
Will the Chinese Bailout really turnout to be a Chinese Takeaway ? Not convinced that the Chinese don’t have problems of their own.. Aspiration is breeding a housing boom similar to the one Ireland experienced. True we could do with the tourism. Perhaps the Chinese recognise that if Europe goes under (and the Euro looks mighty shaky) and with the US economy f**ked there’s no one to buy the next gen mobiles/3D tvs/consumer goods etc. Whether it be US or China or Germany doing the bailing out, lest be assured, they may bailout the boat, but they’ll keep control of… Read more »
Good post You need oil to grow an economy and oil is now approaching triple figures at a time when the US is about to raise it’s debt ceiling. Again. Having Chinese people in Ireland is not the problem because they would show us how to be a bit less bullish and teach us some humility and better manners The US is in decline and has had it’s day. It seems fated to become the land of call centre workers who say ‘have a nice day’ all week long and visit Walmart on weekends We all grew up doped by… Read more »
It surprises me a little, when the Irish numbers are brought up in articles they are invariably linked to the human face, the struggle of the citizen, the damage done to the society, the criminal ineptitude of the government, the lunacy of civil servants etc But when international numbers appear as in this article and in the example of a recent article on Chile, the human context, the face behind the numbers tend to vanish and apparent ‘success’ stories once again appear. However, in reality, the two, the profit and the human story can never be separated, for behind the… Read more »
For someone less advanced in economics, why do you expect the US dollar to depreciate against the Chinese yuan? Is it due to the fact that when the treasury bills are repaid, the Chinese will want to transfer this $ into Chinese yuan or some other currency. Thus creating an oversupply $?
Lunacy Cycle Re-Appears : Tomorrow Wednesday the ‘Pull’ starts again until tomorrow week when after which its glory will turn away its face to hide its secrets once more. These days ahead will liven out the present Moon Wobble that we have read about since November and we must wait to find out whether it departs like a roar of a lion or or a whisper of a giant . Watch your compass change directions where the east becomes the west and west becomes the east and the Yangtze flows into the Shannon and directions of all the flights arrive… Read more »
The economy is soooo bad … The economy is so bad that parents in Bevery Hills are considering raising their own children. … that wives are having sex with their husbands because they can’t afford batteries. It’s so bad, McDonalds is introducing the 1/4-Ouncer. … Exxon-Mobil laid off 25 Congressmen. It’s so bad, a stripper was killed when her audience showered her with rolls of pennies while she danced. …my sister had an exorcism but couldn’t afford to pay for it, and they re-possessed her! The economy is so bad, people are standing behind George Bush wherever he goes hoping… Read more »
The economy is soooo bad ……. Due to a financial coup detat, the constitution is suspended and the Dail is now to be redesignated as Anglo Irish Bank now taken over part of a global corporation ANGLO LLB The economy is soooo bad ……. All financial transactions now come under the Official Secrets Act. Due to commercial sensitivity, all bank accounts are frozen and cannot be accessed, except by the Minister for Finance. The economy is soooo bad ……. All Irish children will be sent abroad for education and work The economy is soooo bad ……. All Irish business meetings… Read more »
Well it’s obvious what the Chinese have to gain by taking over Ireland…water!Dev promised to drain the Shannon but never did,another broken ff promise. Just wait til the chinks send over the supertankers to the Foynes estuary and start sucking,ye’ll be able to make silage in Cavan and Leitrim in October!!
Someone has to do it.
http://www.facebook.com/pages/David-McWilliams-to-Run-for-Irish-Presidency/186150784747819
” There is something unpleasant in the pattern that is unfolding whereby countries with billions of poor citizens are financing countries with millions of rich citizens”.
-but David my good man thats how its always been- (evil laugh) muwhahahahahahahahaha!!!!!