Sunday, June 13, 2010

Greece's Rolling Waves

by Bob Dowling, June 6, 2010

BlackRock's Peter Fisher on the fervid turns of the Chinese economy, Europe's jagged path to recovery and misdirected U.S. financial regulatory reforms

For most of his career, Peter R. Fisher, vice chairman of BlackRock, has been known as a behind-the-scenes player in global financial markets, starting from the time he managed the open market desk at the New York Federal Reserve Bank and oversaw its foreign currency operations. As undersecretary at the U.S. Treasury, he was the bond guy who cancelled America's 30-year bond, winning praise and consternation in the market.

At BlackRock since 2004, he served as Chairman of BlackRock Asia and was responsible for overseeing the firm's businesses in Japan, Korea, China, Taiwan, Singapore and Southeast Asia. Now he is head of BlackRock's Fixed Income Portfolio Management, which has bond assets under management exceeding US$ 1 trillion – making them the largest bond market player in the world.

When asked about the unmitigated horror of the Greek debt crisis on the euro zone, Fisher said there were encouraging signs that European politicians would be willing to drastically adjust fiscal policy. There were less varnished words for U.S. politicians on regulatory reform and what he says are policy actions that will only breed more trouble in the securities industry. Fisher spoke to Caixin in a June 3 interview.

China's Growth

Caixin: What are your thoughts on how China has handled overheating in the economy?

Fisher: They are trying to cool it off and they deserve a lot of points for what they've done so far. But how enduring will that be? Can they get in a comfort zone of somewhat slower growth? The risk for their banks is that slowing down might leave them assets on their balance sheet that are less than desirable as they work through their own property bubble.

Caixin: How would you define slower growth for China?

Fisher: Maybe with all the recent reports of wage pressures they will try to keep growth in a range of 6 percent to 8 percent to reduce the risk of more rapid inflation. Wage gains in the coastal areas could be leading to inflation that will be faster than they are comfortable with. Growth in a 6 to 8 percent range could be a soft landing for China.

Caixin: What do you think of Chinese banks becoming more aggressive lenders in the U.S. both for themselves and for the state's reserve fund?

Fisher: You would expect the Chinese banks to try to diversify the sources of their asset growth and if this creates a source of credit for the U.S. economy, this could be win-win.

Caixin: What about China's ever expanding US$ 2.4 trillion reserve fund – should more of that be invested in China?

Fisher: China's growth has been investment intensive and I agree with those who suggest that China needs to rebalance and get a greater contribution from domestic consumption. To make that switch, many suggest that they have to improve their social safety net. While I would not disagree, I would put more emphasis on the need for the Chinese banking system to better serve consumers, to provide – in effect – a private sector safety net that allows consumers to have confidence in their ability to borrowing against future income. That said, a big part of China's high savings rate really isn't on the personal side, it's on the corporate side and the challenge is one of encouraging more effective recycling of investment from the state industries.

Caixin: You want a bigger consumer lending side for China's banks?

Fisher: Absolutely. They need a way of converting high savings into more personal investment.

Caixin: Do you see China's foreign surplus as ever expanding?

Fisher: There are still large capital flows going into China. But the level of foreign investment is not likely to sustain the pace it has been at for the last 20 years. One source of that surplus is the investment flow. The other is the trade surplus which also may not always grow at such a high rate.

Bob Dowling is a New York-based editorial advisor for Caixin Media

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