China Guts Dollar, Crushes U.S. in Alarming Financial War Game

On a rainy Tuesday in March 2009, U.S. military and intelligence officials gathered in a war room north of Washington to watch a simulated conflict flicker across a bank of video screens.

The struggle was pitting the U.S. against China. And China was winning hands down, writes Eric J. Weiner in “The Shadow Market,” a bleak survey of how flush authoritarian governments deploy financial means to achieve geopolitical ends.

The weapons were dollars, stocks and bonds, not bullets and bombs. The soldiers were Wall Street bankers, hedge-fund traders and economists. For two days, they explored what would happen if the world sank into economic warfare. The outcome was alarming.

“There was no way for America to win,” Weiner says.

Whenever the U.S. did something Beijing didn’t like, China began dumping a fraction of its dollar-backed assets, driving down the currency, sowing economic chaos and prompting U.S. leaders to appease the Chinese. America didn’t have as much leverage with its Asian banker as had been assumed -- a lesson reinforced this week when Chinese Premier Wen Jiabao rebuffed U.S. complaints that the yuan was undervalued.

Weiner, to his credit, is wrestling with a giant squid of a topic -- how China and Mideast oil powers project their cash, tentacle-like, to grab whatever they want. Unfortunately, the subject is as elusive and amorphous as the world’s largest invertebrate. Weiner, a former Dow Jones Newswires columnist, struggles to pin it down.

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The cover jacket of "The Shadow Market: How a Group of Wealthy Nations and Powerful Investors Secretly Dominate the World" by Eric J. Weiner. Close

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The cover jacket of "The Shadow Market: How a Group of Wealthy Nations and Powerful Investors Secretly Dominate the World" by Eric J. Weiner.

“The shadow market,” he writes, “is a collection of unaffiliated, extremely wealthy nations and investors that effectively run the international economy through their prodigious holdings of stocks, bonds, real estate, currencies, and other financial instruments.”

Digital Mercantilism

What we’re witnessing, of course, is mercantilism in the Internet age. The wealth of these nations slithers through the digital depths and surfaces around the globe as purchases of land, commodities and securities.

Though hedge funds and private-equity funds participate in this plot to “secretly dominate the world” (as the conspiratorial subtitle puts it), Weiner focuses on sovereign wealth funds and government-owned holding companies that are buying swaths of the planet, parcel by parcel. While the rest of us shop for junk bonds and value stocks, the Chinese lock in Vietnamese bauxite and the Saudis gain access to some 2 million hectares of Indonesian land for rice-farming.

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Eric J. Weiner who wrote "The Shadow Market: How a Group of Wealthy Nations and Powerful Investors Secretly Dominate the World." Close

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Photographer: Holger Thoss/Simon and Schuster via Bloomberg

Eric J. Weiner who wrote "The Shadow Market: How a Group of Wealthy Nations and Powerful Investors Secretly Dominate the World."

Much of the information compiled in these pages has been reported elsewhere, from Abu Dhabi’s $1.35 billion investment in the Carlyle Group buyout firm to China’s willingness to do business with Iran and Venezuela. What Weiner brings to the debate is a determination to connect the dots.

Striking Gold

Consider gold. The spot price, after falling below $715 an ounce in November 2008, started surging and eventually rose to more than $1,290 an ounce this week. Buyers, it turned out, included China and Paulson & Co., the hedge fund run by billionaire John Paulson. Were the Chinese and Paulson acting independently? Or were they in communication? We can’t say for sure, Weiner says, and that’s his point.

“Even though we can see the shadow market’s symbiosis right in front of our eyes, the truth is that we really don’t know what these countries and investment funds were up to and why,” he writes.

The evidence, in short, is more suggestive than conclusive, meaning we journalists must dig deeper. Sovereign wealth funds prefer to keep their trades secret; rivals, regulators and reporters peer through the murk, struggling to see where the money is flowing.

‘Chess Match’

Weiner devotes considerable space to reconstructing two notorious cases of big-money hardball: China’s arrest of four Rio Tinto Group employees during iron-ore price negotiations in 2009 and Libya’s campaign to win the release of Abdel Basset Ali al-Megrahi, the only person convicted of the 1988 Lockerbie bombing. After marshaling the facts into sensible chronologies, he draws an important if unsurprising conclusion.

“The groups with access to capital and natural resources hold the power,” he writes. “And everyone else is just a pawn in a much larger chess match going on above their heads.”

Europe ‘Collapsed’

Like many writers these days, Weiner seems overawed by the clout of authoritarian thugs and underwhelmed by the strengths of our battered democracies. He dismisses Europe with hyped talk about how it almost “collapsed” during the Greek debt crisis. Nor is there any guarantee, he says, that the U.S. can “straighten itself out financially and buy back its empire.”

I would neither underestimate democracy nor overestimate China, a Communist country awash with corruption, pollution and a shortage of home-grown innovation. Nor would I forget the lesson the Chinese may have learned from Benjamin Franklin.

“A Penny sav’d is Twopence clear,” the American founding father wrote in an aphorism usually quoted as “a penny saved is a penny earned.”

China’s “pennies saved” have become $2.5 trillion in foreign reserves “earned.” That’s a lot of pennies to pelt at U.S. President Barack Obama whenever he suggests that Beijing keeps the yuan cheap to buoy exports.

“The Shadow Market: How a Group of Wealthy Nations and Powerful Investors Secretly Dominate the World” is published by Scribner (304 pages, $26). To buy this book in North America, click here.

(James Pressley writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)

To contact the writer on the story: James Pressley in Brussels at jpressley@bloomberg.net.

To contact the editor responsible for this story: Mark Beech at mbeech@bloomberg.net.

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