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We are so preoccupied in this country with the impact of the credit crunch on house prices, retail spending and jobs that we tend not to notice its geopolitical impact. But this week we received a timely reminder when Russia's Vladimir Putin and China's Premier Wen Jiabao both delivered none -too-tactful rebukes to the West for getting into the mess in the first place, together with a timely reminder that when things eventually return to normal, that normal will be different.
In particular, the West should not assume that countries in surplus will not go on blindly buying American debt to allow it to continue to run massive budget deficits that suck up the bulk of the world's savings.
It is worth remembering that the credit crunch did not just happen, but was born of the economic imbalances created by the US budget and trade deficits — and provided the glut of cheap capital that allowed bankers to drop their lending standards so disastrously. But those imbalances in turn reflect a shift in economic power from the West to Asia in general, and from the US to China in particular. This and the oil and commodities boom have resulted in a massive transfer of resources to these producer countries, with the result that they now hold the bulk of the world's surplus capital.
It is to their sovereign wealth funds that the West has had to go cap in hand for funds to recapitalise our banking system. There is a price to be paid for this. For years, the developed nations have controlled the leading economic forums — G8, the World Bank, the IMF — and worked on the basis that the new nations might be invited to join provided they showed suitable respect and followed the rules.
But the more perceptive Western participants have realised that when they sought solutions to the world's problems, the wrong people were sitting round the table. The power was shifting elsewhere, and the elsewhere were not represented — yet it was impossible to conceive a solution without their active engagement and help, as they were the ones with the money.
One hope was that the creation of G20 as a body to include most of these newly rich or otherwise significant nations would prove sufficient to defuse the issue and provide a forum to steer a way through the crisis. The tone of the comments from Russia and China suggest it will not be enough. We had better get used to it.
Fingers crossed for funds hunt
A £4 billion rights issue is a major fund-raising exercise even in a good market, so the fact miner Xstrata felt it could go for this amount in London yesterday says a lot about the underlying resilience of the £4 trillion investment pool that is the London equity capital market.
Despite the turmoil elsewhere in the financial system, the gloomy forecasts about the world economy, institutional shareholders are doing their bit to keep the wheels turning. The mistaken perception of the London Stock Exchange is that capital-raising has come to a halt because, with the exception of Resolution which raised more than £500 million just before Christmas, there has been a shortage of large initial public offerings. People just don't float companies in difficult times.
But, as was pointed out by LSE director of equity markets Martin Graham at a conference yesterday, capital-raising is not done just through IPOs. Although there were more IPOs last year than is commonly thought — a total of 73, raising £7 billion — this was insignificant when set against the sums raised in secondary offerings. Count in all the rights issues and placings, and the total capital raised soars to a breathtaking £63 billion. This is serious money even in an age when banking bailouts have dulled the sense of size.
This resilience of the equity market, and the willingness of investors to support companies, are crucially important now, and will be even more so in coming months. Word is a stream of rights issues is currently being worked on that will hit the market shortly. When credit is squeezed as it is now, companies have to find money from somewhere. Let's hope the market can absorb what is about to be thrown at it.
Reader views (3)
Ken, Bangkok, very wise words. The west has been sleeping.
I have heard that the Chinese abroad combined are the worlds 4th larget economy.
In terms of G20, nice idea but really how can 20 representatives of countries with such different agendas ever make a meaningful agreement?
- Rikrok, London, UK
Why should China or Russia be tactful about this? America's disgusting triumphalist gloating over what happened to Russia ten years ago means that Russians have no sympathy for them or us now.
The tragedy is that if the US, (and to a lesser extent, countries like the UK) had been more magnanimous at the downfall of communism and willing to help out on any terms other than to further their own narrow idealogical agendas then there would probably be far more international goodwill to genuinely work together than currently exists. Magnanimity in victory isn't particularly about being nice, it's about being sensible and thinking in the longer term.
- Tam, London
Having lived in Asia for the past 25 years (Singapore, Hong Kong and Thailand) I have been banging on for a long time about the dangers of getting ourselves in hock to China. The Chinese play a very long game. And they never, ever use their money without a purpose. Living on Chinese credit is extremely dangerous. It weakens us immensely.
Take a look at how the Chinese control, through the Chinese diaspora, Southeast Asia. Look at how the Chinese are moving into Africa. Look at how the Chinese blatantly disregard Western intellectual property rights. Look too at how China is making progress in digital espionage. And ask yourself: if it came to a showdown between China and the West, can we take it for granted the West would win?
- Ken, Bangkok
