Financial crisis: will China help?

There have been plenty of rumours going around in the last few days that China is ready to step in and purchase chunks of Wall Street.

Much of Wall Street could soon belong to China

But the people actually doing the buying have been Barclays, Nomura and now Mitsubishi.

All that Chinese Investment Corp (CIC), the giant sovereign wealth fund, has done is put out a job ad. It wants to hire more than 30 financiers to do everything from economic research to stock picking.

Perhaps CIC is getting tired of the dismal advice it has been getting from seconded American bankers (buy Blackstone! buy Morgan Stanley!)

One important side effect of Wall Street's meltdown is that the Chinese have been disabused of the supposed superiority of the American financial system.

Even in the less panicky stages of the credit crunch, one senior Chinese regulator had only one word to describe big Western banks to the Economist: "s**t".

And on top of the (public) money that China has already lost in Morgan Stanley and Blackstone comes the real kicker - the value of the dollar is plunging as the US cranks up its presses and prints its way out of the crisis.

The $1.8 trillion of foreign exchange reserves held by China are still largely denominated in greenbacks and there must be some horror in Beijing at the plans put forward by the Fed. Alex Patelis, an economist at Merrill Lynch, has put together a handy list of what the US is planning to spend:

1. Treasury buying mortgage-related assets: $700bn

2. Potential supplementary stimulus package favoured by Democrats: $100bn

3. Insuring money market funds: $50bn

4. Treasury fortifying the Fed's balance sheet: $100bn

5. Expansion of temporary swap lines with central banks: $180bn

6. Loan to AIG: $85bn

7. Fed purchase of agency discount notes & ABCP: amount not specified

8. Fed loans through the Primary Dealer Credit Facility: $20bn through sep 17

9. Fed's discount window: $33bn balance

10. Treasury purchase of GSE MBS this month: $10bn

11. Potential cost of Fannie/Freddie bailout: $200-$300bn

With a neat symmetry, the $1.5 trillion-or-so total is what some people believe the Iraq war will end up costing.

As investors bail out of the dollar, China's mandarins will have lost (yet more) face with their public for their poor investment decisions. And there will be serious economic consequences. Just as the US threatens to slump into recession, Chinese-made goods will become more expensive for American consumers.

Since China's economy is still strongly dependent on exports, there may be a painful knock-on effect. Stephen Green, an economist at Standard Chartered, has already significantly marked down his estimates for growth in the next two years.

So if Chinese government officials are not keen on wading even further into the mire of Wall Street, who can blame them? Link Here, More