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Japan, China Locked In by Investments

Japan's Nikkei share average rose Friday, rebounding from a three-year closing low Thursday.
Japan's Nikkei share average rose Friday, rebounding from a three-year closing low Thursday. (By Issei Kato -- Reuters)
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Sogano said there is no political support in Japan for mobilizing the several trillion dollars in Japanese pension funds and other savings funds to recapitalize troubled U.S. financial institutions. He agreed that such investments, if properly managed, could increase returns for savers in Japan.

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China, however, has signaled some willingness. As U.S. financiers scrambled this week over how to deal with possible collapse of major financial institutions, Chinese Vice Premier Wang Qishan arrived in Washington with a message: To survive the crisis, U.S. equity markets need countries such as China that have massive foreign exchange reserves to jump in a big way.

In recent weeks, finance chiefs from around the world have come to consult with their counterparts at the Federal Reserve and U.S. Treasury about possible interventions.

China's delegation, headed by a 60-year-old ex-banker who comes from the country's depressed coal-mining region, has been among the most vocal, according to sources briefed on the discussions.

China has a direct interest in the U.S. crisis. It is estimated to hold a fifth of its currency reserves -- as much as $400 billion -- in Fannie Mae and Freddie Mac debt. In addition, its banks have billions of dollars worth of exposure to the American International Group, Merrill Lynch, Lehman Brothers and other companies in crisis. 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.

As U.S. officials were deciding in August whether to take over Fannie Mae and Freddie Mac, the Treasury Department held informal talks with officials from the People's Bank of China, the country's central bank. At that time, investors in Fannie Mae and Freddie Mac in China were dramatically reducing their holdings. The U.S. side told China that a cash infusion was in the works; China said that it expected the U.S. government to "do whatever is necessary" to protect the investments.

Accompanied by a delegation that includes senior officials from China's central bank and Ministry of Finance, as well as banking, insurance and securities regulators, Wang had originally traveled to the United States on Sept. 14 for trade talks in Los Angeles. But as new shocks hit earlier this week, Wang flew to Washington to meet with Treasury Secretary Henry M. Paulson Jr.

Wang sought assurances that if the Chinese government were to encourage its companies to seek investments in the United States, the deals would not face the same political opposition that has undone past Chinese investment proposals.

Andy Xie, an independent economist who was formerly Morgan Stanley's chief Asia economist, said the United States needs to accept that a large amount of U.S. assets must be transferred to other countries' ownership. "If the U.S. is not willing to accept that," Xie said, "they will have to print money and the dollar will fall. And we will be headed toward a global financial meltdown."

Companies in the United States and in Europe are already reaching out to Chinese investors.

Morgan Stanley chief executive John Mack has been in contact with the China Investment Corp., the sovereign wealth fund that manages $200 billion, and with China's Citic Group. La Compagnie Financière Edmond de Rothschild on Thursday announced that it had sold a 20 percent, $340 million stake to Bank of China.

It's unclear how Chinese investors will respond to the overtures, especially given that their biggest investment in Wall Street to date, CIC's investment in asset manager Blackstone Group, has turned out to be a disaster -- its investment has lost half its value.

Cha reported from Shanghai.


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