The Shifting Of Economic Center Of Gravity.

Economic historians may record that 2007 was the start of the credit crunch, as well as a crucial shift in the balance of power from the West to the East. The East here is metaphorical - including the Middle East and Russia, both flush with cash from higher oil revenues, as well as the more traditional East.

Ecologists identify three forms of symbiosis between competing species: commensalism (one species benefits); mutualism (both species benefit); parasitism (one species benefits, the other species suffers). It is not clear which of these three forms the current East-West money symbiosis represents.

It is a shift in power from borrowers (the West) to savers (the East). Even before the current credit crisis the vast current account surpluses and savings of the East were being recycled into investments in North America and Europe.

The credit crisis has accelerated and altered the reliance on eastern capital. Barclay's secured equity capital of up to 13.4 billion euros from China Development Bank and Singapore’s Temasek Holdings in support of its ultimately unsuccessful bid for ABN-Amro. More recently, banks and sovereign wealth funds from the Middle East, Singapore and China have invested $40 billion in Citigroup, UBS, Merrill Lynch, Morgan Stanley and Bear Stearns to help shore up balance sheets ravaged by losses from the credit crisis.

The economic center of gravity has also shifted east. In recent history, U.S. consumer spending buttressed by a strong dollar has been the primary engine of global growth. The current credit crunch has exposed the weaknesses of the U.S. consumption miracle. Markets are now looking to the emerging markets of Asia, Eastern Europe and the Middle East as the driver of the global economy.

How important is this shift in balance? In the 1980s, Western firms feared a takeover by gargantuan Japanese banks. In the 1990s, there were predictions of a new Asian century.

The jury is out on the merits of the recent investments in distressed banks. The investment rationale for many transactions is questionable. The flow of capital may also not continue at its recent rate. Citigroup is rumoured to have sought to raise $2 billion in capital from China Development Bank. There are suggestions that there is opposition to the investment within China's government. This appears to reflect growing backlash in China following the $3 billion investment in Blackstone that has decreased sharply in value (by about 30%).

There are also increasing signs that Western governments and public opinion is increasingly restive about the prospect of significant foreign ownership of key companies in strategically important sectors. Remember the fuss that ensued when CNOOC, the Chinese state oil company sought to purchase Unocal leading ultimately to the transaction being abandoned.

For the moment, the West and the East are like Siamese twins that share vital organs. Eastern capital and growth offers one of the few bright spots in a darkening global outlook. It is the lifeline that the U.S. and European economies and institutions that are clinging to.