What will the Federal government do when it runs out of money?  The crisis is not necessarily over.  The financial contagion is just beginning to reach companies, consumers, states, and municipalities.  Harvard's Kenneth Rogoff thinks the Federal government could be on the hook for five times more than it is now by the time this "once in a century event"--Alan Greenspan's term for the current turmoil--has passed. 
 
This possibility seemed unthinkable until this month, when the Bush administration got its $700 billion bailout (http://money.cnn.com/2008/10/03/news/economy/house_friday _bailout/index.htm?postversion=2008100309) through Congress.  That's on top of the Federal Reserve's emergency loans (http://www.forbes.com/markets/2008/10/12/aig-federal-reserve-markets-equity-cx_md_1010markets35.html) of $123 billion to financial giant AIG.  This bailout followed rescues of investment bank Bear Stearns, mortgage lenders Fannie Mae and Freddie Mac, and the Federal Housing Authority.  Add up all the recently assumed exposure to calm financial markets, and you arrive at a figure of at least $1.40 trillion. 
 
So where will the bailout money come from?  Many Americans look abroad, especially to cashed-up China.  After all, we are living in what many have dubbed "the Chinese century."  Beijing holds the keys to the world's greatest fortune, foreign exchange reserves (http://www.forbes.com/feeds/ap/2008/10/14/ap5551229.html) of $1.9 trillion at the end of last month.  Its sovereign wealth fund, China Investment Corp., started with $200 billion and is the world's fourth largest.  Moreover, about 150 state-owned enterprises are generally cash rich, and the six largest state banks are among the largest and best capitalized anywhere according to their financial statements. 
 
Last December, CIC made an investment of $5 billion in troubled Morgan Stanley.  CITIC Group, a Chinese state investment vehicle, was rumored to be in negotiations to buy equity in the investment bank and could do so when the dust finally settles.  No wonder analysts, seeing Beijing deploy its financial might, have been hoping (http://www.theglobeandmail.com/servlet/story/RTGAM.20081014.wcoching1015/BNStory/specialComment/home) that the Chinese will devote more of their resources to rescuing the United States.
 
China, however, has economic problems that rival America's.  For one thing, the Chinese central government is not as rich as it appears.  Central officials incurred local currency debt to amass Beijing's foreign currency reserves, so the government assumes both business and currency risk every time it uses them to make investments offshore.  Moreover, the central government does not disclose all its obligations, from World Bank loans to bank bad debt to social welfare liabilities.  Estimates of national debt run as high as 120 percent of the country's annual gross domestic product, an amount about twice the internationally accepted alarm level.   
 
China has been able to carry its large debt burden because its economy has expanded an average of 9.8 percent over the "reform era" of the last three decades.  Last year, the economy officially grew by 11.9 percent.  This year, China is in the first stages of a slowdown, and next year looks like it will even be worse than this one. 
 
When I was in Beijing at the end of June a well-known fund manager told me that he and all his colleagues expected a "very bad" recession and that most everyone he knew was selling assets to eliminate exposure.  His pessimism has been matched by that of domestic investors generally--Chinese stocks have lost more than half their value this year--and by the country's academics, who for at least three years have been predicting a 2009 recession. 
 
The ruling Politburo is also gripped by recession psychology.  At the end of July it abandoned its inflation-fighting program and started a campaign to stimulate growth.  As a result, Beijing has used every measure at its disposal to make credit more freely available.  Last month, for instance, the central bank eased lending rates for the first time in four years.  Chinese leaders are unlikely to splurge on distressed American assets while they are concerned about the downward direction of their own economy.
 
Moreover, Beijing's technocrats are leery of making bad investments.  The government purchased a $3 billion stake in Blackstone Group last May.  The move was particularly ill-timed, and China saw its investment decline by more than $500 million in six weeks. The immediate loss provoked an outcry among the country's nationalistic netizens.  Then, this March Beijing called off a deal, announced last November, to invest in Bear Stearns because the Wall Street bank failed.  Beijing cannot politically afford to see any more American deals go sour.  
 
Therefore, we should not be surprised that last month Beijing announced it would use part of its cash hoard to buy publicly traded shares in three of its largest banks and its biggest state-owned enterprises.  Moreover, this month the Communist Party's Central Committee confirmed (http://hosted.ap.org/dynamic/stories/A/AS_CHINA_ECONOMY?SITE=RIPRJ&SECTION=HOME&TEMPLATE=DEFAULT) the new policy direction by saying it will devote its efforts to expanding domestic consumption and stabilizing the economy.  In this crisis, the Chinese government will be putting most of its funds to work at home. 
 
Gordon G. Chang is the author of The Coming Collapse of China.

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