Monday, March 29, 2010

Roubini’s Collision Course Is Warning for Google: William Pesek


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Commentary by William Pesek

March 29 (Bloomberg) -- Sergey Brin shouldn’t expect many invitations to visit China this year.

Google Inc. has ginned up considerable hostility with its move to pull out of the third-biggest economy. And co-founder Brin has been anything but subtle in explaining why. Last week, he told the Wall Street Journal that China’s censorship of cyberspace smacked of “totalitarianism.”

We now know Brin wasn’t bluffing, and good for him. Google got the memo about China’s vast potential. It just doesn’t want to kowtow to its quirks, as do corporate bigwigs the world over. Google is willing to risk China’s enduring ire.

Now if you are China’s government and you want to avenge Google’s headline-grabbing slight, what do you do? Buy it.

That’s but one of the possible unintended consequences of rising pressure for a Chinese revaluation. Every 5 percent increase in the yuan makes U.S. corporate gems such as Google cheaper for acquisitive nations like China.

Here are four reasons a stronger yuan may backfire.

One: accelerating inflation. There are new reasons to think China won’t boost the yuan, including the sudden appearance of a trade deficit. China may report a shortfall of more than $8 billion in March, compared with a $24 billion surplus in October, as imports grow faster than exports, Premier Wen Jiabao said on March 22.

Surplus to Return

It may not be the monumental event some suggest. A trade surplus could return faster than it disappeared as the effects of China’s stimulus efforts wane. If China’s economy cools even slightly, exports will quickly top imports again.

A trade deficit would still raise eyebrows both in Washington and Beijing. It would negate U.S. demands for a stronger yuan and make China less willing to engineer one.

A stronger currency could devastate the “Wal-Mart Economy.” In an age of stagnant wages, Americans are relying on cheap imported goods from China. It would be a shock to bargain- shoppers and U.S. inflation data if those goods were to surge in price. Are officials in Washington taking a consumer backlash into consideration?

Two: market turmoil. New York University economist Nouriel Roubini is right when he warns that the U.S. and China are on a “collision course” on currency issues and that investors are underestimating the disruptions for global financial markets.

Currency Manipulator

Academics such as Niall Ferguson of Harvard University are urging the U.S. to call China a currency manipulator and get the Group of 20 nations to press the government in Beijing to act. Even Chinese chief executive officers, such as Yang Yuanqing of computer maker Lenovo Group Ltd., are joining U.S. President Barack Obama in backing a stronger yuan.

The U.S. needs to meet China halfway and address its own imbalances. China is digging in for a fight, and Congressional elections are forcing U.S. politicians to prepare for a faceoff. This war of words will reverberate through markets everywhere.

Three: a Chinese slowdown. In a world devoid of economic engines, less growth in China is in no one’s interest. China’s underappreciated fragilities are part of the problem.

Even if there is a trade gap in March, China’s economy is still largely an export machine. That’s why some Chinese say a stronger yuan makes sense: It would boost domestic purchasing power. Fiscal pump-priming will only work for so long and may pave the way for a massive bad-loan crisis in the years ahead.

Reliance on Growth

It’s an open question whether China could stand its ground if it strengthened the yuan, say, 10 percent against the U.S. dollar. Communist Party leaders know their legitimacy rests on rapid growth. Less gross domestic product means less tolerance of the government’s policies.

Four: increasing China’s sphere of influence. This gets us back to China buying Google some day. Of course, this is all a bit tongue-in-cheek. The odds of Brin and co-founder Larry Page welcoming Chinese acquirers are perhaps even lower than Congress allowing it. The same is true of companies as diverse as Intel Corp., Ford Motor Co. and Morgan Stanley.

China’s money -- the government alone has $2.4 trillion of currency reserves to deploy -- will still come knocking, especially as the yuan rises. Mining companies in Australia and New Zealand should expect more and more Chinese visitors.

Offers for Microsoft

If you think the Japanese buying Rockefeller Center and Universal Studios upset Washington in the 1980s, just wait until cash-rich China comes knocking at Bill Gates’s door. “Greetings Mr. Gates -- we don’t have time to create our own Microsoft Corp. How much do you want for your company?”

An equally touchy issue is China’s money going into Asia, Latin America and Africa at the expense of America’s strategic interests. China’s worldwide resource grab to fuel its economy has brought it much leverage.

Officials in Beijing have been pumping billions of dollars into developing nations. China could easily call on governments that it supports to back its priorities at, say, the United Nations. Each increase in the yuan brings that day closer as China’s money spreads around the world.

China should let the yuan appreciate. Just don’t expect things to unfold without kinks. As Roubini warns about how markets will fare, Google should be looking over its shoulder.

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--Editors: David Henry, James Greiff.

To contact the writer of this column: William Pesek in Tokyo at

To contact the editor responsible for this column: James Greiff at

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