KEY POINTS:
Leave it to Citigroup 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 per cent 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 like Morgan Stanley.
It would be the latest sign China is, according to Joseph Quinlan, chief market strategist at Bank of America Capital Management, "America's Financial Sugar Daddy". First came its US$3 billion ($3.8 billion) investment in Blackstone Group, one of the most capitalist of Wall St vehicles. Now, "communist" China is routinely bailing out the masters of the financial universe.
China is hardly Wall St's only saviour. Singapore's state-run Temasek Holdings tossed a US$5 billion life preserver at Merrill Lynch. And now, after a US$7.5 billion investment from Abu Dhabi Investment Authority, Citigroup may be getting a cash infusion from China and Saudi Prince Alwaleed bin Talal.
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 St at fire-sale prices. In the West, sub-prime 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 St's hubris.
The Chinese bubble that gets the most attention is stocks. The CSI 300 Index climbed 162 per cent 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.
Oil prices near US$100 a 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.
Saudi Prince Alwaleed's consumption patterns say it all. He's buying his own Airbus SAS A380 superjumbo jet for personal use. That US$319 million purchase is 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 St'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 St 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 St shares could take a hit as investors bet on an end to bailouts from China Inc. Or if Wall St'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 St 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 St when he wrote his 1932 novel. Yet the motto of the utopian world Huxley created - "community, identity, stability" - isn't all that unlike what Federal Reserve chairman Ben Bernanke, Citigroup chief executive Vikram Pandit and Chinese President Hu Jintao are trying to achieve.
As the world's bubbles intersect, the challenges of the global system arguably become more complex. It will be interesting to watch them co-exist, feed off and perhaps even reinforce each other in the months ahead - or frightening.
- Bloomberg
