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IT USED TO BE SAID that when the United States sneezed, the rest of the world caught a cold.
These days, it seems when China pulls its money strings, the rest of the world jumps.
With one exception -- Google (GOOG) -- which has decided not to twitch like a marionette from the tugs from Beijing. That's required something absent from the anatomy of most corporations, a backbone.
That China's money talks is undeniable. Global financial markets gyrated Tuesday in reaction to the latest move by China's central bank to rein in its highly accommodative monetary policy to curb inflation from that nation's overheating economy.
In Asia at midday Wednesday, the MSCI Asia Pacific Index was down 1.1%, in sync with similar declines in the broad U.S. equity averages. But the Shanghai Composite and Hong Kong's Hang Seng index were off a sharper 2%. Commodities also lost ground on expectations that reining in China's booming economy will curb demand for metals and petroleum products. The prospect of tighter money also knocked gold down more than $20 Tuesday to $1,129.40 for the February Comex contract.
While world markets were reeling in the latest evidence of Beijing's growing economic might, Google said late Tuesday it is considering withdrawing from China after apparent "highly sophisticated" hacking of human rights activists' Gmail accounts.
In a note on its corporate blog, Google chief legal officer David Drummon wrote that, while only two Gmail accounts appeared to have been hit, the company had evidence suggesting "a primary goal of the attackers" was to get into the Gmail accounts of Chinese human-rights activists.
Drummond continued that Google has decided to cease censoring search results on Chinese Google sites and would discuss with Beijing how it may operate "an unfiltered search engine within the law, if all."
That may mean shuttering Google.cn, its Chinese search site, and potentially its offices in China, he added.
Google's stance was lauded by a variety of rights groups, but one has to wonder how many corporations would be able or willing to do the same.
Meantime, impersonal global markets have no choice but to respond to tugs on the monetary lead from Beijing.
Anticipating the recent moves by the People's Bank of China -- first a nudge up in money-market rates last week and an increase in banks' reserve requirements this week -- Charles Dumas of Lombard Street Research in London wrote last month that China's monetary tightening would withdraw the only source of liquidity expansion for the world's economy.
Broad money-supply growth in what Dumas dubs the Big Five -- the U.S., Euroland, Japan, the U.K. and China -- has been flat over the past year. And that's only because of China's 30% growth in its money stock. Take that away and broad global money is shrinking despite the quantitative easing or "money printing" by the Federal Reserve and the Bank of England. All those efforts have accomplished has been to fill the hole left by debt paydowns.
With the only source of global liquidity growth, China, throttling back, the investment implication is to shun risk assets such as stocks, Dumas concludes. And after a backup in U.S. Treasury yields owing to concerns about the end of Fed buying of long-dated securities, he calls Treasuries "the best game in town," excepting German bunds (also the favorite these days of Pimco's Bill Gross.)
The world economy has gotten hooked on China's money and trade. Resisting that, Google is taking a stand on principle, instead of profit. Meanwhile, markets are left to follow Beijing's lead.
Comments: randall.forsyth@barrons.com
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