U.S.: China and the Caribbean

According to a story run in Stratfor Weekly, China's economy is not as stable as might have been thought, and this potential instability is attributable to China's "[n]ew lending policies." How dangerous is the situation? There is some concern that the Chinese economy may be disintegrating, and this is based on on reports of an order, issued by the Chinese Cabinet, instituting a three-day suspension of lending by the China Banking Regulatory Commission. This three-day period was actually more like a week because of the May Day festivities. It is possible that the order signifies Beijing's alarm with events in the banking system and international loss of confidence in the Chinese economy. Hence, Beijing implemented the three-day suspension to gain breathing space for planning. Alternatively, the suspension might be a warning shot intended to bring the banking system in line and force the system to correct itself. Whatever it may be, the unavoidable conclusion is that China's economy and its banking system are in trouble. The only uncertainty pertains to the attitude of Beijing; for, they might be either worried or panicked.

China may be following in the footsteps of other Asian economies, such as Japan, which went from superpower to dud during the 1990s; East and Southeast Asia, which imploded in 1997. The common thread here is the speed of the meltdown, and China appears to be pursuing the same path of her Asian sisters. The critical issue with Asia's banking systems is that, instead of making lending decisions based on market forces, the allocation of capital and the variation in interest rates are determined by "political and social considerations." Moreover, Asian economies are driven by loans rather than equity (sale of business shares).

Beijing is gambling that reducing the amount of bank loans would halt the crisis; the danger is that complete cessation of loan activity brings the banking system to a total halt. Increasing foreign investment and exports are two ways that can help prevent that halt from occurring. The first signals that Beijing is taking charge of the situation, but the second measure is more shaky because it depends on China's production abilities and limitations, as well as on whether foreign markets have reached saturation point for Chinese goods.

Had China been able to keep the three-day banking moratorium quiet, that would have bought Beijing the time to handle the problem. As it stands, news of the problem hit the Wall Street Journal and, as a coping strategy, China abandoned the moratorium and now can't control its banking system without going public about the problems in the system. However, the rest of the world is becoming aware that China has a huge problem on its hands and that its banking system might be close to self-destruct.

The draconian measures that China needs to take are not feasible without concomitant political upheaval, and the blocked elections of Hong Kong signals how Beijing will handle that upheaval. Moreover, the cash outlays by individuals and organizations in China are occurring even though they know the true nature of the country's crisis.

This is significant to the Caribbean Basin because China has made a number of forays in the region. For instance, on 5/9/04, we carried this story:

THE University of Guyana (UG) on Friday signed a Memorandum of Understanding (MOU) with the Fujian Agriculture and Forestry University of China, to engage in a number of activities including technical assistance and training, joint research and exchange of staff, undergraduate and graduate students.

Also, on 4/28/04, this one:

PM Skerrit does not agree with statements being made that we are selling our votes to Japan for nothing. He says the money will come based on friendship. Source: DBS Radio
...
Work on the new Dominica Grammar School building, funded by the PR of China, is expected to begin soon. Already the old Citrus Processing building close to the present school is being torn down in preparation as part of Phase I. Source: Marpin TV News.

On 4/2/04, we ran this:

GUYANA is likely to venture in mushroom cultivation during the second half of this year, as a visiting Chinese technical assessment team says conditions here are suitable for producing the increasingly consumed vegetable.

A four-member Chinese team led by Zhang Jianwe yesterday met Minister of Fisheries, Crops and Livestock and acting Minister of Agriculture, Satyadeow Sawh, Director of the National Agricultural Research Institute (NARI), Dr. Oudho Homenauth and Agricultural Research Scientist, Dr. Mohamed Faroze.

The Chinese team is here to assess experimental work here done to identify mushroom species that suitable to the Guyanese climatic and environmental conditions.

Finally, on 3/28/04, we noted that:

There are three news clips worth combining. This one, 3/29/04:

Following establishment of diplomatic relations with the PR of China, they will fund the following projects: renovation of the Windor Park Stadium; rehabilition of the Roseau to Portsmouth road, major upgrade to the Princess Margaret Hospital. Source: Marpin TV News.

This, 3/29/04:

Of the benefits to be had with China is EC$300M grant funds for which four projects are already scheduled. Of the 4 projects comes the construction of the Windsor Park which is to begin before Independence of 2004. Source: DBS Radio.

Also, this, 3/30/04:

PM Skerrit, on behalf of Dominica has officially broken ties with Taiwan and has formally established ties with the People's Rep. on China, stating that there is only one China and that it is too big to be ignored. Source: DBS Radio.

Money definitely talks. So much for allies. This does not augur well for any of Dominica's regional allies should a large enough country, bearing gifts, make Dominica an offer she can't refuse.

Furthermore, it looks like Chinese influence is spreading throughout the Caribbean region, the same way it is in Africa. Cause for concern? Yes. Freedom is not a value in China.

These cash outlays, which Beijing is making in spite of the true nature of the country's crisis, are a signal to the international community that Beijing has the financial system under control. That is the message of Beijing's increased foreign investment in the Caribbean.

Moreover, Beijing's financial largesse at this difficult time is a Hail Mary pass intended to create new or expand existing markets in the Caribbean, for China desperately needs that for its products in order to maintain fiscal stability. Thus, China's sudden ubiquity and interest in the Caribbean are really ventures in Chinese self-interest designed to halt the meltdown of their financial system.

It's a hell of a gamble, and the Caribbean countries -- such as Dominica -- that have bellied up the table and jettisoned older and more stable allies to do so, are likely to wind up with a trade balance that works in China's favor but without the funds they thought they would obtain, especially if Beijing is forced to devalue. Skerrit may have bet all his chips on a losing hand in a game whose rules China may be trying to make up as she goes along.

Big-ups to EPG for the link.