By: KENNETH MAXWELL

Folha de São Paulo - Op-ed section - page A2   

2008 will be the year of China, and not only because of the Olympics: Politics and economics will also intrude, and not all will be sweetness and light. Two factors make this likely. First, the working out of the credit crisis in the US and Europe, and in particular the methods used by the Middle Eastern and Asian "sovereign," that is state controlled, investment funds in providing liquidity within the international financial system. Secondly, the US presidential election campaign (beginning in earnest today with the Iowa caucuses) will undoubtedly take on an increasingly populist tone as the year progresses, especially if the US enters into a recession. On economic questions the average US citizen is more "nationalist" than the business and political elites; this shows up consistently in polls conducted over the years when "leaders" opinions are contrasted with those of the general population.

It is worth remembering in this context the consequences of last great oil price rise crisis in the late 1970s when huge surpluses of dollars built up in the hands of the petroleum producers. The US banks recycled these "petrodollars" to the cash starved developing countries in Latin America. These loans, they claimed, represented no risk. The borrowers were National governments, that is "sovereigns," and nations they said do not disappear or go bankrupt. So, in the 1980s, when these "sovereigns" did indeed begin to default, it became evident that the smart ones all along had been the Arabs, and not the US bankers, much less the Latin American borrowers. It was after all the US bankers, not the Arabs, who had assumed the liability for the recycled loans.

This time around the petrodollar surpluses in the Middle East are supplemented by the huge foreign exchange reserves of China and the new "sovereigns" have become investors not borrowers. They have liquidity at just the moment the US and European banks do not. So Asian and middle eastern state controlled investment funds are gobbling up substantial stakes in US and European financial institutions: 9.9% in Morgan Stanley by the Chinese investment corporation; 9.4% in Blackstone by the China investment corporation; 6% in Bear Stearns by Citrus.

The bankers think this is good news; but they got it wrong last time. Recent opinion polls in the US show that 58% of Americans think that globalization has been bad of the US, and Republican and Democratic voters are close to agreement on this question. In an election year, and facing tough economic times, voters tend to believe the old (non Chinese) proverb, that "he who pays the piper calls the tune."

KENNETH MAXWELL is a weekly op-ed columnist (every Thursday) for Folha de São Paulo, Brazil's leading newspaper