Wednesday, Oct. 29, 2008

By KEVIN RAFFERTY

Special to The Japan Times

HONG KONG — His hair has turned white, but his voice is as mellifluous as ever and his wit just as eloquent and rapier-quick in puncturing balloons of self-importance and pomposity. It was a real delight to watch him in a BBC Hardtalk discussion on the economic crisis as he pricked pretentious statements of British Prime Minister Gordon Brown, French President Nicolas Sarkozy and former Fed Chairman Alan Greenspan with a few well chosen but eminently fair words.

But I am worried about Chris Patten, the last British governor of Hong Kong. His talents and experience are being frittered away just when the world needs a politician with his global knowledge and, more important, with the battle scars to demonstrate that he understands the difference between high vision and grubby practical political possibilities.

It is time for someone to rescue Patten from the worthy tedium of processing through the streets of Oxford as the chancellor of its ancient university, from sitting in the secondary house of Parliament, from boring corporate boards and conferences, and from fretting about deadlines for his newspaper articles. Patten and the world deserve better than that.

There is a job that would test him and that he would do better than anyone else. But it needs an act of statesmanship, vision and courage on the part of China's President Hu Jintao for Patten to be given the opportunity. Does Hu have the wit and wisdom to suggest that Patten should be the person to preside over a reform of the broken global financial system?

Why should China be involved? Because China is the great outsider with a massive stake in the global financial system, but only a tiny voice. This is not a mere academic question any more. The view that China and Asia would continue growing unaffected by any slowdown or economic or financial crisis in the United States or the West has been shattered in the last few weeks, which have shown how the world is interlocked. China's stock markets have tumbled. China's growth has started to fall.

China also has a huge stake in the West, not only because of its reliance on exports for jobs and growth but also because it has $1.9 trillion in reserves mostly invested in dollar instruments. Attempts to diversify have proved a disaster.

China set up the China Investment Corporation with $200 billion to get better returns from its reserves. CIC invested $3 billion in the Blackstone private equity concern and $5 billion in Morgan Stanley, and has seen the value of the shares drop by 70 percent. CIC also has $5.4 billion frozen in a money market fund that "broke the buck," or saw its net asset value fall below a dollar, because of a large investment in Lehman Brothers debentures.

Some economists claim that CIC's performance has been stellar in comparison with the money that China is losing through Bretton Woods 2, under which the U.S. has been allowed to run huge current account deficits and fund them through foreign purchases of U.S. debt (rather than take nasty economic medicine as the International Monetary Fund would prescribe for any errant developing country). By one calculation, China is bleeding $270 billion a year — or more than 7 percent of its gross domestic product — through this system. (The calculation counts the 1 percent return on the U.S. assets transferred back into renminbi and adjusted for inflation to give a real return of minus 15 percent.)

Essentially, China has an immense stake without a proper voice in any of the world financial councils, from the Group of Seven and the Financial Stability Forum to the IMF and World Bank.

The IMF and World Bank were set up more than 60 years ago after a conference at Bretton Woods of 44 Allied countries to put together a global system for a better postwar world. The system has been patched up many times to squeeze new members in (today 185 countries whose governments are the shareholders), and to catch up with a rapidly changing world. Government ownership of course complicates reform, especially because the U.S. has massive 16.77 percent voting power in the IMF, in practice a veto. Even after much heralded recent reforms, China has only 3.66 percent, and India 1.89 percent, far below Japan (6.02 percent), Germany (5.88) or France and Britain (4.86 each).

The U.S. has been the main culprit in manipulating the system, from Richard Nixon's unilateral decision to stop the direct convertibility of the dollar to gold, to today when Washington has taken a free ride on the generosity of China, Japan and others by running its huge current account deficits. That is why it is an act of risible vainglory for lame duck U.S. President George W. Bush to call a global conference next month to fix a system that the U.S. has broken.

Why Patten? Because he is one of the few politicians with a global understanding who dares to speak truth to power. Beijing knows that. He is British and European and a lover of America who is prepared to challenge all and any of them. He has also demanded that it is essential for China and India to be key players in a reformed system. He has a keen sense of the difference between blah and substance, and the scars from battles in the Conservative Party, in Hong Kong and China, and in Europe. He has been tested in executive office as a minister in Britain, as the last governor of Hong Kong and as a European commissioner.

An act of courage by Hu might also go some way to acknowledging that Patten — far from being a "jade-faced prostitute" or any of the other insults that Beijing then threw at him — was honestly trying to do his best for Hong Kong and China when he was Hong Kong's reforming governor.

When it comes down to it, many politicians are all talk, no action — as Patten recognized when he pointed out that Brown spoke eloquently about reforming the system, but had done little when he was chairman of the key IMF committee. Patten also gently put down the former U.S. Federal Reserve chairman Alan Greenspan for suggesting that there was "froth" in the U.S. housing market — "It was not froth that sank the Titanic," said Patten.

If Patten were given the job, he would have to decide whether the existing system should be supported by a crutch and a huge bandage, to replace a series of small Band-Aids, or whether he could get international consensus for a complete redesign and overhaul to create a global financial architecture that can support the needs of the 21st century with China as a main partner. Hu should challenge Patten and the world.

We welcome your opinions. Click to send a message to the editor.