U.S. Concerns Made In China

Double whammy of bad news for the United States coming out of China today.

Firstly word is that China wants to shift some of its foreign exchange reserves from U.S. dollars into other currencies.

The second is the emergence of a Chinese automobile industry that worries auto-makers in Detroit.

Regarding the foreign reserves:

China now boasts the world's second-largest cache of foreign exchange -- behind only Japan -- and is on pace to see its reserves climb past $1 trillion later this year. Even a slight diminishing of the dollar as a percentage of those holdings could exert significant pressure on the U.S. currency, many economists assert.

In recent years, the value of the dollar has been buoyed by major purchases of U.S. Treasury bills by Japan, China and oil-exporting countries -- a flow of capital that has kept interests rates relatively low in the United States and allowed Americans to keep spending even as debts mount. Some economists have long warned that if foreigners lose their appetite for American debt, the dollar would fall, interest rates would rise and the housing boom could burst, sending real estate prices lower.

A precipitous unloading of dollars is not, however, in China's best interest either. Diversification will have to happen in a measured way:

Not all economists anticipate negative repercussions for the U.S. economy. Were China and Japan to engineer a significant fall in the dollar, those nations also would suffer the consequences -- sharply diminished exports as Americans lose spending power, plus a drop in the value of their dollar assets.

"It is thus extremely unlikely that China would do anything to harm its own balance sheet," wrote Stephen Jen, an economist with Morgan Stanley, in a research note distributed Monday.

This will be a delicate dance.

Meanwhile a nondescript car at the Detroit Auto Show is making the industry boys worry:

It does not matter that Geely [pronounced JEE-lee], the Chinese carmaker getting a lot of attention at the auto show here, has yet to sell a single car in the United States. It is the possibility it could that has Detroit talking.

"I think it's the beginning, the very beginning, of Chinese international participation in the U.S.," said Robert A. Lutz, General Motors' vice chairman and product development chief. "A few years down the road, sure, it'd be foolish not to see it as a threat."

Once upon a time it was the Japanese and Koreans that were the new kids on the block, and at first their offerings were not considered a threat to the American companies. Not now:

"The only question is when," the chief executive of DaimlerChrysler, Dieter Zetsche, said of a Chinese presence in the United States. "The Chinese would be stupid not to do so. The Chinese are very intent to build a national auto industry. That is clear."

Recalling the collective shrug American automakers gave when Japanese cars entered the market, Detroit, in particular, is paying attention.

"Remember, the first Toyotas were laughable," Mr. Lutz said. "The first Hyundais that we saw were laughable."

This while Detroit is suffering, and Ford and GM are shedding employees and running in the red:

The deepening financial troubles of General Motors Corp. and Ford Motor Co. will likely overshadow the shimmering new car and truck models on display at the Detroit auto show next week, one of the industry's most important annual events.

The North American International Auto Show, beginning Sunday in downtown Motor City, comes as the two U.S. automakers -- facing cutthroat competition, high labour-related costs, shrinking market share and excess capacity -- are preparing to report their fourth-quarter and full-year financial results.

Analysts expect GM, which has lost nearly $4 billion (2.3 billion pounds) through the first three quarters of 2005, to post its fifth straight quarterly loss later this month. Cross-town rival Ford is expected to eke out a small quarterly profit, but announce major plant closings and blue-collar layoffs.

"The next 12 months will not only determine the very future of the domestic automobile industry as we know it, but Detroit will become the lightning rod for the most pressing issues facing this country -- health care costs, pension reform, global competition and its threat to the industrial foundation of America," said Peter DeLorenzo, auto analyst and publisher of Autoextremist.com, a closely-watched industry Web site.

The mood will be sombre at Ford's stand with Americas president Mark Fields and other top executives avoiding questions on the details of the automaker's long-awaited restructuring plan for North America during the show.

Ford Chairman and Chief Executive Bill Ford Jr. has said the turnaround plan, expected to be revealed on January 23, would include "significant plant closings" and job losses.

Used to be the only news that came out of China had to do with the communist leadership and the nation's military strength. These days, it is mostly to do with the rapid growth of an economy powered by 1.3 billion people, and an industrial engine that cannot be ignored, and is shaping the world in ways their political power never could.