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Financial Risk Transfer – U.S. Kills Buddies

International Herald Leader under Xinhua published an article on October 6 on the U.S. economic policy under the situation of the world financial crisis. [1]

International Herald Leader under Xinhua published an article on October 6 on the U.S. economic policy under the situation of the world financial crisis. [1]
On October 3, the U.S. Congress passed the $850 billion financial rescue package. President Bush was relieved with a smile on his face, but led Chinese experts to worry.

US Assets Melting Down

 “The United States has always asked the whole world to bear the U.S. difficulties. It won’t be an exception for this time.” Zhou Shijian, Senior Research Analyst of the US-China Research Center of Qinghua University, told the reporter in an interview. Since the World War II, the United States has been issuing large amount of U.S. dollars (cash) and issuing national debt to resolve its economic crises. However, these methods, to certain extent, amount to transferring the risks to other countries including China.

Lu Qianjin, Associate Professor from Department of International Finance of Fudan University, said the main source of the rescue package issued by the United States was increasing national debts; it would make the financial deficit even worse, consequently, increasing the deficit in trade. It could hinder the growth of U.S. dollars and potentially force the dollar back to the depreciation track.

 “If the dollar depreciates, the price of the future oil products will remain high, and it poses the risk of asset melting down for the countries that hold U.S. assets.” Lu Qianjin said. At the same time, Lu said: “these countries will also face the same risk of asset melting down if the United States is to reduce its debt by depreciating the dollars.”

 “$850 billion rescue package is like purchasing medicines from the world to cure the U.S. disease.” Zhou Shijian told International Herald Leader. Currently, there is only one third of the U.S. dollars circulating within the United States. According to the report from the U.S. Treasury Department, China is the second largest holder of the U.S. debts.
Companies in China Are Suffering “US Default”

In reality, since the financial crisis started, the U.S. has been transferring its crisis to others. Zhou Shijian is using word of “killing buddies” to describe the U.S. behavior. “Europe has the best relationship with the United States, now Europe is in a crisis. The next is Japan, and then China” Zhou Shijian said.

Lu Qianjin said, China is not only facing the risk of dollar depreciation and bankruptcy of the U.S. financial institutes, it also faces the risk of the U.S. companies transferring their losses by defaulting on payments.

Currently, there are thousands of companies in Zhejiang Province facing default of the U.S. companies. The financial crisis has caused the decline in consumers’ spending in the United States.  Importers could not get their cash collected and the cash flow fell short. In addition, banks have tightened up their loans. Importers could not get their loans easily. Some importers announced bankruptcy after their cash flow broke, as a result, the companies in China could not get their payments for goods exported to the United States.

 “The U.S. companies have actually transferred their losses [to Chinese companies].” Lu Qianjin said.

Psychological Impact Could Not be Ignored

Tan Yaling, from the China financial research center of Beijing University, said in this financial crisis, through proactive adjustment, the U.S. has moved from reaction mode to pro-action mode and has transferred its loss to others.

 “The United States has a mature economy.  Many of its actions are strategic and foreseeing.  Sometimes, it uses the psychological factors to influence countries like China and to transfer its risks.” Tan Yaling said that  the U.S. stock market is going downward, however, the U.S. dollar index is going up.  “It is very abnormal. Therefore, you could see the U.S. strategies coordinate very well as planned.”

Tan Yaling said further that the dollar strengthening is to meet the need of inbound asset flow to the US. “It satisfies the market need in this special period,” at the same time, the U.S. is using the fluctuation of its stock market to throw the world into crisis. Even on the same day of the rescue package approval, the stock market dropped.

“Why it could be this way.  October 3 was Friday and the Chinese market closed for that week. On Monday before we open the market, we must check the U.S. market.” Tan Yaling said.

Tan Yaling told International Herald Leader, “by self-adjustment, the U.S. is using the psychological factors and policies to influence the market development in other countries.” The U.S. is not stronger than others, but rather behaved worse than others.

Or to Expand the Export of the Military Products

Because the rescue package costs $850 billion, the U.S. has to pay a huge amount of interest in the future. Lu Qianjin said that to make up this big hole, the U.S. could expand its export in military products.

 “There would be strong opposition if the U.S. government wants to tighten up the belt of its own people to solve the problem by increasing the taxes. One may have seen the opposition during the process of negotiating the rescue package.” Lu Qianjin said that another way of improving the economy and lessening the financial pressure would be to expand exports to increase income and tax revenue. “Especially expanding the export of military products is a fast and effective way of relieving the financial pressure in the US.”

Currently, the U.S. government has started to sell military products to Taiwan and the total amount will be $6.46 billion. “In the future, the United States may use future geo-political conflicts or the alleged potential military threats to expand exports of military products to certain countries and areas, hoping Exports of Munitions would alleviate domestic economic problems.” Lu Qianjin predicted.

[1] International Herald Leader, October 6, 2008