Although considered unlikely, analysts say a more rapid decline of Greenbacks could prove disastrous. A global run on the dollar would force the Federal Reserve to hike interest rates to prop up the U.S. currency just as lower interest rates may be needed to stimulate the domestic economy.
There's a good reason schools across the country are scrambling to find people who can teach Chinese: It's quickly becoming business' second language as Wall Street seeks to tap China's $1.3 trillion in foreign reserves.
China has been making increasingly aggressive investments in some of the world's most prestigious financial companies in recent months — most of them American. Morgan Stanley, Bear Stearns, Blackstone Group, and Britain's Barclays have all negotiated major stakes by Chinese government-controlled investment funds. This is true that China’s economy is growing and generating huge money. See the video below.
Investment banks ailing from the subprime mortgage mess are looking for money to shore up their balance sheets. And China is leading a surge of strategic investments from Asia and the Middle East that so far have sunk about $25 billion into Wall Street banks.
That's just the start of what some believe is a dramatic reversal of financial power in the shadow of Wall Street's credit turmoil. Lower interest rates have caused the dollar to slide in value against other major currencies. And, for foreign governments, the devalued dollar makes investments in these financial institutions cheap.
In the 1980s, Japanese investors snapped up real estate and invested in businesses across a number of sectors. This new wave of foreign investment is different because Asian and Middle Eastern governments are taking stakes in financial institutions — a cornerstone of the U.S. economy.
China agreed to pay $5 billion for a 9.9 percent stake in Morgan Stanley, and those securities pay 9 percent a year until they convert to shares in 2010. That translates to a gain of about $450 million of cash next year.
But, for Morgan Stanley investors, the infusion of new stock two years from now will dilute their shares — and potentially make owning Morgan Stanley's securities less valuable. The same can be said about other banks that receive foreign investments.
The deals have been structured so that the sovereign funds are passive investors with no seat on the board, and this escapes regulatory scrutiny. This week President Bush said Thursday he was "fine" with foreign investors snapping up big stakes in U.S. banks and financial firms.
By keeping investments under 10 percent, it does not trip an automatic review by the government. Bush, and others, believe the injection of foreign capital helps keep the banks competitive and restores faith in an industry beaten down this year.
But, some banking analysts believe these government-sponsored funds might get more say than the banks are admitting.
"The Chinese are putting $5 billion into Morgan Stanley without there being some kind of quid pro quo of what they're going to get other than interest on their investment," said Dick Bove, an analyst with Punk Ziegler & Co. "It's part of a major shift in the worldwide financial system that I think will be very negative to the U.S."
He said these kind of investments are not over, and expects to see others surface next year. In some cases, investment banks that have already received investments might strike other deals to increase capital.
Next up? Speculation swept through Wall Street on Friday that Merrill Lynch & Co. is on the hunt for a foreign investment to help cushion what could be a huge fourth-quarter writedown in January.
"The whole situation has changed with financial power moving dramatically toward China and the Middle East, and that will have significant impact over time," Bove said.
In China, where the currency still trades on a narrow, government-controlled band linked to the dollar, authorities have resisted global pressure to allow its currency to appreciate faster. The Chinese currency has gained about 11 percent against the dollar since 2005. But by keeping the currency relatively weak, Chinese companies have managed to ride the weak-dollar export boom -- making their products even cheaper in countries where the greenback has sharply dropped.
But now, some in China are turning their noses up at the dollar. Lin Jing, a sales manager at Shanghai Shuangyuan Import & Export Co., which exports garlic oil, said the company has begun to demand euros from its overseas customers instead of dollars. "The use of euros enables us to shy away from losses caused by the conversion between the [Chinese currency] and the weakened dollar," he said.