A Washington Post article on the current financial crisis points out the major role of Chinese funds in the Wall Street meltdown and provides more evidence of the symbiotic relationship between the U.S. and Chinese economy. It is estimated that China has a fifth of its foreign exchange reserves invested in $400 billion of Fannie Mae and Freddie Mac securities. Chinese banks have billions more invested in teetering Wall Street firms. The article points out "the Industrial and Commercial Bank of China, for example, has $151 million in bonds issued or linked to Lehman; China Merchants Bank has $70 million of Lehman bonds; and the Bank of China has $75.62 million of Lehman bonds."
Wall Street is now reaching out to Chinese investors, asking them to provide a needed infusion of funds. Isn't most of China's foreign currency reserves already in U.S. assets? Why would Chinese investors want to pour good money after bad? One of the big investments made by China's sovereign wealth fund was in the Blackstone Group, which turned out to be catastrophic.
As pointed out in earlier posts on this blog, the financial meltdown was built to an extent on the unsustainable trade gap between the U.S. and China in which the U.S. gets goods from China in exchange for dollars which China invests in U.S. securities. With all that cash being recycled back into U.S. financial markets, bond prices stayed high and interest rates low. The phenomenally low interest rates fueled the housing and consumption boom, pushing consumption levels and asset prices to unsustainable levels and hypnotizing the U.S. population into thinking 15-percent growth in housing prices would go on forever.
Meanwhile, China has 10 million new workers coming on the job market every year AND it wants to become a high-value high-tech economy, so Chinese policymakers were desperate to keep job-creating exports pumping.