First Blackstone, then Barclays …
The alliance between the Chinese state – lest we forget, still a (nominally) communist state — and the high priests of global financial capitalism is close to complete.
Goldman, Royal Bank of Scotland and Bank of America all have invested in China’s big state banks, effectively partnering up with China’s government. And China’s government is now an equity investor in Blackstone and – with a bit of Blackstone help – looks to be taking a stake in an (expanded) Barclays as well. Technically, the investment in Blackstone came from the new investment company while the cash for Barclay's is coming from China Development Bank, but, well both ultimately have the same owner. I presume some part of China's government will soon buy an equity stake in a major hedge fund or investment bank as well. Why not go for the trifecta ..
Commercial banks used to be robbed, according to the famous quip, because that was where the money was. Now the money is in the hands of China's government. And China seems willing to deploy it far more aggressively than in the past. The formation of the state investment company seems to signaled a decision to go straight from bonds to strategic stakes, without bothering to fiddle with small, liquid holdings in a range of companies. Any one looking for financing to do a really big deal will, I would guess, soon make a pilgrimage to Beijing.
Dr. Dooley, Dr. Garber and Dr. Folkerts-Landau have long argued that China needs to hold liquid foreign exchange reserves — think US Treasuries — as collateral against foreign investment in China. But China's state no longer seems all that interested in swapping Chines equity for low-yielding debt denominated in a depreciating currency. Western banks investment in China’s large state banks should be offset by equally large Chinese investment in large western financial institutions. Rather than swapping equity for debt, China's government wants to swap equity for equity.
The ironies abound.
The British state’s retreat from the “commanding” heights of the British economy seems increasingly to be offset by ascent of other states, whether the Chinese state or a set of active Gulf states. The point here is more general: Asian and Middle Eastern governments – through their investment funds — increasingly are playing a role in Western economies that voters do not necessarily think their own governments should play.
China's investment in Barclays is coming from a lender theoretically devoted to "development" — both domestic infrastructure lending and subsidized lending to Africa. I guess there is more poverty in the City than I thought. Either that or China Development Bank is now more commercial than China's state commercial banks.
A few years back, it was often argued that China's state would inevitably need to retreat from its commanding position in China's own banking system. China would need to turn the keys to its banks over to US and European banks if it wanted to develop. Now it seems like China's government is poised to get the keys — OK, not quite; China Development Bank's stake in Barclays falls well short of control — to another countries banking system well before it relinquishes control over China's banking system.
And it increasingly seems like the highest stage of Chinese communism will turn out to be financial capitalism. I am not quite sure that anyone would have guessed back in 1949 that China’s communist government would be invited into Wall Street and City board rooms – or, for that matter, that China's communists would ever have accepted.
Then again, it was rather hard to imagine even a few years ago that China’s communist government would insist that the most important expression of Chinese sovereignty is its continued ability to mobilize — through the central bank and other state-owned financial institutions — China’s savings to subsidize Wall Street and the City, along with US and European consumers. China lends — and I assume invests — on terms that almost guarantee losses for China (see Chan Akya).
I also personally find it ironic that many of the strongest advocates of free markets vigorously defend an exchange rate regime whose necessary consequence is a growing government presence in financial markets, and see far more worried by the prospect that US pressure might prompt China to change than by the prospect that China's government might continue to add to its external portfolio.
China’s exchange rate peg means that China's state will accumulate $500b in external assets this year – and unless something changes, even more next year. China's citizens have made it clear that they don't want to hold assets denominated in a depreciating currency. That means China's money-losing external investment (barring extraordinary returns that offset dollar, euro and pound depreciation against the RMB) will be done by the China's government. And China's government — like many others – has made it clear that it no longer just wants to buy bonds. Not if it can buy banks.
I suspect that the growing relationship between China’s state and major financial firms won’t do much to address popular concerns about the turn that globalization has taken. Workers in industries that compete with industries that have located some of their production in China certainly don’t think China’s government is on their side. Some big financial firms do (literally). China's emergence has put downward pressure on the wages of many, but clearly helps to increase the salaries (or perhaps capital gains) of those who get a cut of very large deals ….
Unlike some, I don’t think globalization necessarily implied emerging economies would use their central bank balance sheet to subsidize the financial sectors of the US and Europe. Rather, I think the current form of globalization stems directly from a set of policy choices – choices that may end up making China’s government a big player in many markets, not just the bond and currency market.
Update: Tony Jackson of the FT's take on Barclays/ CDF. He seems rather more concerned — at least by the prospect of an outright Chinese (or Russian) government takeover of a large UK bank — than Felix Salmon.
In global financial terms, US$500 billion isn’t an insanely huge amount of money. The big banks each have assets of about US$1 trillion.
Also, Wall Street is more comfortable with government regulation and much less laissez-faire than one might think. Government securities regulations and oversight are absolutely essential for the financial services industry to function since there is no way that an honest bank can compete with a dishonest bank, absent government regulation. New York is a solid blue state and more Wall Street donations are going to Democrats than Republicans this year.
Also you don’t need extraordinary returns. If one assumes that the RMB needs a revaluation of 20-30%, then spreading it over five to ten years means no extraordinary returns are necessary. And I’d argue that keeping the money in China would cause much larger losses than the 20-30% currency loss.
If China CNOOC made a bid for the Hess oil corporation, similar in size to Unocal with significant holdings of upsteam oil production, it would most certainly be vetoed by the US government on National Security threat grounds. In the developing world, the Chinese are diversifying their US dollar foreign reserve holdings with the acquistion of strategic natural resources. For instance, CNOOC has recently acquired offshore oil field reserves in Nigeria, Kenya, and Somalia. Chinese CNPC, parent of PetroChina, has acquired energy assets in Syria, Argentina, Canada, and Ecuador. In the more advanced Western industrial nations, the Chinese appear to be diversifying their US dollar reserves into minority ownership of financial corporations. By contrast, if the Chinese were to acquire a US technology or natural resources corporation, there would most certainly be a larger national security road block by US government regulators.
Twofish — i suspect the size of the RMB appreciation that would happen now is more than 20-30% (look at the move in the euro since 2002), though i don’t know. and over time, strong Chinese productivity growth would imply ongoing appreciation of the RMB — so the cumulative appreciation in the rmb might be far larger than the initial move.
finally, the big banks have big balance sheets because they gear up — they borrow a lot of funds from depositors. China’s got real money. It too could gear up. If the SIC wanted to invest borrowed money along its money in a major acquisition, i suspect it could find the financing.
China:
A top-down system where citizens have no vote in choosing their leadership.
Modern Corporations:
A top-down system where employees have no vote in choosing their leadership.
China’s just a country run like a business.
This move is not about ideology. And its certainly not about subsidization of the US financial sector. It’s about economics - China wants better returns. It’s being smart, given the domestic policy hand it’s decided to deal itself. The exchange rate policy and its risk is only the backdrop to the new objective of getting more bang for the buck on a growing piggy bank.
brad, not sure that one can unequivocally call China’s money ‘real money’ - unlike the oil exporters, China’s reserves are levered by the RMB debt (be it sterilization debt of PBOC or the planned new RMB bond issue by the government to support the new investment agency…)
Actually no. The main reason that the CNOOC deal was blocked was that Chervon had a rival bid, and wanted to play hard ball. The second reason, was that CNOOC was slow in getting its own board to agree to the deal. Had CNOOC not been in competition with Chervon, the deal would have probably gone through quietly.
This is partly why China is buying into and being bought by companies headquartered in the United States. Any future deals will have a US based partner which will help the Chinese partner clear the landmines that exists in the US. Someone that brokers these deals mentioned to me that when you do business in the United States, it is important to have a lot of “guanxi.”
:-) 
At one seminar one of the participants mentioned that being allowed to do business in the United States is probably the main reason Chinese banks are giving equity stakes to American banks. The Chinese government wants to have a set of global financial companies hq’ed in China, and when it comes time to move into the US market, having “guanxi” is useful.
the subsidy to the financial sector comes from the flows generated by the exchange rate policy (I should have linked to my old post on this topic), not the investment in the UK’s financial sector per se (tho that will push up the compensation of some deal makers).
Fair point about China not having real money — china’s government does act like an intermediary, selling rmb debt to buy overpriced foreign assets (in rmb terms, as the weak rmb cheaps foreign assets expensive). However, its equity is in some sense unlimited. the World bank has callable capital. China’s various external investment organs have really callable capital. that makes it a bit more like real money. still, a good point.
“The alliance between the Chinese state - lest we forget, still a (nominally) communist state — and the high priests of global financial capitalism is close to complete.”
The first thing I thought when I read you’re opening line was the last scene in Orwell’s Animal Farm, when the pigs and the farmers are almost indistinguishable from each other. Great post.
bsetser: What ever the loss is, it is really hard for me to believe that the losses (even a 30% to 40% loss) in investing Chinese money overseas would be greater than keeping the money at home. China does need more investment in health and education, but $150 billion/year will do that nicely, that still leaves a huge chunk of money that needs to be invested.
Boosting consumption is unwise because of the age structure of the Chinese population. Creating a government sponsored pension system just moves the money around and you still run into the limits of the Chinese financial system to allocate money.
they need to go now, otherwise the democrats will lock them out; of course they can’t make direct campaign contributions, but they can move thru intermediaries (like they do in their foreign exchange operations) and lobbying groups, cf. saudi and carlyle…
http://www.c-span.org/rss/video.asp?MediaID=31599 - Ken Silverstein, Harper’s Magazine, Washington Editor
Washington Editor for Harper’s Magazine, Ken Silverstein, discusses his article, “Their Men in Washington: Undercover with D.C.’s Lobbyists for Hire.” The article examines what lobbyists for foreign governments do, how they do it and how much of their activity is open to Congress and the general public.
The notion of real money can be somewhat ambiguous. CA surpluses are definitely real money (country savings/equity). Sterilization debt transforms risk in this sense, rather than leveraging it.
The similarity between big business and the Chinese Communist Party isn’t coincidence since most of the Chinese Politburo are engineers that started managing factories. The culture of a Fortune 500 company and the Chinese Communist Party is really quite similar down to the filtered internet, the slogans that people really don’t believe in, the mandatory classes, and the political officers (in a company they are called legal and compliance). Getting something done in China is very similar to trying to get something done in a large corporation.
Whether you consider it is good thing or not depends on your point of view, but since I’m not particularly negative toward the global financial system, I don’t see this as a particularly bad thing.
J. Bradford DeLong’s The Corporation as a Command Economy — “That our economy is populated by large corporations shapes how we live. Our social being cannot but be shaped by the one-third of our waking lives spent at work. Our politics would be very different without corporations both as sources of pressure an influence on politicians and as intermediaries serving the purposes of politicians.”
But if the Chinese state is going to behave as a strategic, corporate actor (on a scale never before seen), does it make sense that other states should ignore that, and act as though the “market” is made up of small, diverse players and market power is a transient imperfection?
In business, we all understand that industries consolidate competitively. Once a behemoth is created out of several smaller firms, remaining firms look for partners to create an entity of similar scale. In economic theory, this makes little sense, but actual managers understand that strategic choices matter, that ones portfolio of strategic options increases with scale, and that it can be fatal to be outgunned.
“Corporatist” China is making use of a variety of strategic options. We can only speculate on their purposes. All we can be actually sure of is that we have left the realm of economic theory, because straightforward return maximization under existing market conditions is not the primary driver of their policy choices. As Dave Chiang describes it, China appears to be engaging in shrewd geopolitics under the cover of global finance. It seems to me that, as a planet, we will either have to enforce a norm that this is simply illegitimate (that would be next to impossible at this point), or else other states will have to start behaving as strategic corporations in the competitive industry of statecraft. I wish this were not the case. Competitive statecraft often spills to nonfinancial means, and is what many of us had hoped global capitalism would eventually render obsolete.
Who does it take “a lot of” to get a deal done in China? Should the US government raise a special tax, and use the funds to buy the support it needs for taking the strategic stakes it wants in China’s economy? Should America’s income tax be doubled, and the proceeds used to fund the deals we want to do? Would it matter if the US adopted the same policy, but in a more subtle way? Is this the kind of world we want to live in?
I do see this as a particularly bad thing.
re: “engaging in shrewd geopolitics under the cover of global finance”
are you inferring that the U.S. and other players are not?
America’s Superpower financial preeminence in the world depends to great extend on its ability to control the global economic system. That system requires that the dollar continue to be linked to oil reserves, otherwise known as US Dollar hegemony. But everywhere the petrodollar is under attack. The only solution is to control two-thirds of the world’s remaining petroleum -which is in the Caspian Basin—and demand payment in dollars and only US dollars.
But that plan has failed. The war in Iraq is lost and the longer America stays, the harder the fall will be. Oil will not continue to be traded in petrodollars, the USD will lose its place as the world’s “reserve
currency”, and America will slide into a long and agonizing economic downturn. The United States needs to extend the olive branch to China and Russia and prepare for the inevitable shifting of world power.
incidentally, does CDB really have $400b in assets? that’s way bigger than i thought. And how does it get access to fx? I clearly don’t know as much about china’s financial system as i thought.
Egadzooks…the Asia Times?! Don’t mess with such fare, sir. In any event, the author is incorrect on the IMF’s current stance on Asian reserve accumulation. According to Chan, the IMF has a policy of encouraging this accumulation even at a time when these countries have accumulated far more reserves than necessary.
First off, the advice was made circa 1997-98 when the Asian financial crisis was in full swing. Moreover, the advice was more aimed at ASEAN-bloc countries affected by the Crisis than at China.
Bringing Mr. Chan back to 2007, it’s the very same IMF that’s now likely to warn China over currency misalignment since its updated fourth principle for foreign exchange policies stipulates:
A member shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.
“…A July 17 report showed foreign buying of U.S. financial assets climbed to a record. Yet, Paul Meggyesi, a currency strategist at JPMorgan in London, finds it odd that only $11 billion of the $163 billion of purchases was attributed to central banks. The data show the People’s Bank of China sold U.S. Treasuries in May even as its reserves rose by $46 billion. Something doesn’t quite add up in the U.S. Treasury’s International Capital System statistics, or TIC data. Why, for instance, did U.K. investors begin buying U.S. securities just as the People’s Bank of China started increasing its pace of reserve accumulation in 2004? “Is this more than a coincidence? I believe it is,” Meggyesi says. For the past three years, the reserve buildup in Russia, China and rest of Asia has overshot the recorded official purchases of U.S. securities…” http://www.bloomberg.com/apps/news?pid=20601039&sid=aJXUbmAAktUA&refer=columnist_mukherjee
[q]But if the Chinese state is going to behave as a strategic, corporate actor (on a scale never before seen), does it make sense that other states should ignore that, and act as though the “market” is made up of small, diverse players and market power is a transient imperfection? [/q]
I doubt that the Chinese state can or will behave in that way. The trouble with making centrally planned investments is that the State Council is probably not the best forum for making investment decisions. What will probably happen is that China’s foreign exchange reserves are going to be divided up into two or three funds, with the overall direction being “make money.”
[q]“Corporatist” China is making use of a variety of strategic options. We can only speculate on their purposes.[/q]
The purpose has always been to make China a rich and powerful country.
[q]All we can be actually sure of is that we have left the realm of economic theory, because straightforward return maximization under existing market conditions is not the primary driver of their policy choices.[/q]
Actually I think this *is* the primary driver of their policy choices. There is a reason why the Chinese government wants Blackstone and Barclay’s to manage its money, and that is that Blackstone and Barclay’s will tend to invest it in non-stupid things. If you have the State Council do it, the money will end up wasted on some white elephant project that doesn’t do anyone much good, and won’t advance the goal of turning China into a rich and powerful country.
There is a Bubble in Chinese stock market, but the long term economic trend for China is still upwards. - Dave C.
Citi loses top spot to Chinese bank
Industrial & Commercial Bank of China’s market capitalization rises to $254B, exceeding Citigroup’s $251B
http://money.cnn.com/2007/07/23/news/international/bc.icbc.citigroup.reut/index.htm?postversion=2007072307
SHANGHAI (Reuters) — In a fresh sign of China’s financial strength, a leap in the shares of Industrial & Commercial Bank of China on Monday made it the world’s biggest bank by market capitalization, overtaking U.S. giant Citigroup.
ICBC’s Shanghai-listed A shares surged 2.68 percent to 5.75 yuan, giving it a market capitalization of $254 billion, according to Reuters calculations.
That exceeded the $251 billion capitalization of Citigroup (Charts, Fortune 500), previously the world’s biggest bank, when its shares closed at $50.73 in New York on Friday. HSBC Holdings (Charts) was in third place with $215 billion.
and how many (publicly listed) banks does China have, not that the dissimilarities between Western and Eastern banks would end there.
interesting that while china courts western finance, and the world’s nastiest oilfields, India seems to be focusing on building its own financial services capabilities.
“…Somalia has no proven oil reserves, and only 200 billion cubic feet of proven natural gas reserves. Companies including Agip, Shell (Pecten), Conoco and Phillips (now merged), and Amoco (now part of BP) spent over US$150 million on onshore exploration in the 1980s and early 1990s, but no oil reserves were discovered… because China’s oil firms lack the technical capabilities and political clout of the Western majors, Beijing prefers to deal with regions that are out of reach to the competition. This practice has sparked a growing backlash across Africa to China’s policies. Many locals see Beijing’s actions as protecting corrupt and often dictatorial leaders…” http://www.pinr.com/report.php?ac=view_report&report_id=667&language_id=1
“The ICICI Group, the country’s largest private sector financial services provider, has signed agreements with colleges and universities across the country to create a talent pool of around 1,00,000 [presume 100,000?] people in banking and insurance over the next five years…” http://www.business-standard.com/banking/storypage.php?tab=r&autono=292028&subLeft=1&leftnm=2
Three hundred to four hundred billion sounds about right. However, CDB is what China uses instead of municipal bonds. Municipalities do not have borrowing authority in China, and so when they need cash, they get a loan from CDB which then issues debt securities. CDB is a policy bank rather than a commericial bank which means that their decisions are not based on commercial profit, unlike most of China’s other banks.
As far as FX. I’d imagine that the get their FX from the PBC after a rubber stamp by the State Administration for Foreign Exchange.
the possibility that blackstone and barclays may put their interests above china’s interests ought to be considered …
for sure…
now they’re calling it “nationalisation under foreign flags” http://www.portfolio.com/views/blogs/market-movers/2007/07/23/when-governments-buy-companies
Barclay’s and Blackstone’s interests are to maximize risk-adjusted returns. I don’t see the conflict here with Beijing’s interests.
Brad:
“Rather, I think the current form of globalization stems directly from a set of policy choices - choices that may end up making China’s government a big player in many markets, not just the bond and currency market.”
By choices, do you mean the decision to defend the peg? I am not sure if the Chinese government had let Yuan rise, the story would be any different. In either case, there are big Chinese corporations flush with cash seeking investment deals.
“The point here is more general: Asian and Middle Eastern governments - through their investment funds — increasingly are playing a role in Western economies that voters do not necessarily think their own governments should play.”
I think you’re showing your idealstic roots and bent here. I think those of us who are realist-economic determinist sorts would look at that statment and shrug our shoulders. It’s the way the game is played, so we should play better. I mean didn’t the British government in 1860 play a role in Chinese economy that Chinese didn’t necessarily think their own government should play?
I am glad that our attempts at “corrupting” you and luring you to the “dark side” haven’t succeeded. Keep up the good work!
Well, the real prophet of this sort of convergence was John Kenneth Galbraith in
his _The New Industrial State_, which has just been reissued by Princeton University Press, with a new introduction by his son, James. Of course, he was wrong in the short run vis a vis the (then) Soviet Union and the US, but now we are seeing it come to a fuller fruition.
First of all it isn’t true that voters don’t think that their governments should play the role of investor or even active investors.
The US Federal government doesn’t do it, but state pension funds and university endowments are very active market players. The state of California Pension Fund has assets of $250 billion. New York State Pension Fund has assets of $150 billion. The University of Texas permanent endowment is around $10 billion. These funds (along with Temasek Holdings) are probably the model for what the PRC government is trying to do with its currency reserves.
Corporations are basically mini-planned economies, but they don’t encompass the entire economy, which makes a huge difference.
i suspect there will be a lot of discussion of the differences (or not) between the Middle East investment funds/ China’s investment funds and Calpers and the like. and last I checked, Calpers didn’t have a big stake — the kind which implies control — in both Citi and ICBC. But you are right, i was thinking about the federal government.
LC — absolutely right that Britain played a far larger role in China’s economy in 1860 than most Chinese wanted it to play. The long-term result? A strong counter-reaction against foreign economic control, if memory serves. I guess turnabout is fair play.
Dave Chiang said
“Oil will not continue to be traded in petrodollars, the USD will lose its place as the world’s “reserve currency”, and America will slide into a long and agonizing economic downturn.”
If that’s the most likely prospect - and IMO it can very well be - then China is acting extremely foolishly by continuing to pile up USD reserves, whether in cash or treasuries. While dumping them outright would be like shooting in their own feet (Greenspan himself said there was no likelihood of that to happen because “they would have no one to sell to”), they should at least stop accumulating forex reserves by revaluing the RMB and getting to a state of neutral current account balance.
Making an analogy with an individual’s behavior, it’s foolish to keep saving when you have more than enough for your lifetime.
Barclay’s and Blackstone’s interests are to maximize [their] risk-adjusted returns
“…Even Blackstone, a seemingly generic name, is no such thing. Founders Steve Schwarzman and Pete Peterson more subtly stamped their identities and their family roots on the business through a name that combines Schwarz (German for black) and Petros (Greek for stone)… In a sense, that cult of personality is reassuring for shareholders. They know that the individuals who successfully built the businesses are still in charge of keeping them on track. With big ongoing stakes in the management companies, at least until they decide to sell, they remain highly incentivised to keep earnings and hence share prices strong. But that is also a risk. Coupled with their big stakes and dominant characters, the founders have often structured the voting power in their companies in a way that ensures they retain pretty much total power…”
http://www.ft.com/cms/s/2aa95c1c-315e-11dc-891f-0000779fd2ac.html
re: “A strong counter-reaction against foreign economic control”???
then why are they pegged, accumulating USD, taking non-controlling positions in foreign firms, and producing (at discount rates) and consuming ‘foreign’ brands
Hi all.
I want to apologize for my comments above, not for content, but for tone. The thing I’m most afraid of is resurgent nationalism in a time of crisis, and comments like mine above are exactly not the most helpful way to put things.
China’s growth path is both a miracle and a mystery, and I’m honestly stuck between awe, admiration, and, yes, fear. I think what is euphemistically called “global financial imbalance” represents a very dangerous situation. I also hope that I am just a crank. I don’t actually think China’s leadership planned all this, and in their place I’m not sure I’d have done anything differently. It’s hard to argue with a miracle. And the United States is certainly not an innocent, and shares very much of the blame for whatever is amiss. I agree with other commenters that the best thing that could happen is a cooperative resolution, and I find much more to fault with America’s leadership than with China’s. But whoever is to blame, I am frightened, both in a nationalistic way (of which I’m a bit ashamed, but I do have an attachment to the welfare of my own nation), and in a global way. Lots of the bad parts of history had economic undercurrents.
Again, I’m probably just an alarmist crank. In fact, I hope I am an alarmist crank. And I do think we are all just stumbling through history, and regret that the tone of my previous comment seemed to suggest otherwise. I admire China’s successes, and hope we all get through this together, perhaps with some dreams of grandeur dashed, but mostly in one piece and flitting back and forth like friends who can’t get enough of one another. This blog, both its headline author and frequent commenters, is remarkable for the levelheadedness and seriousness with which these issues are discussed. That, at least, is one reason to be optimistic.
Twofish, You make some important points and throw in lot of interesting facts but they all seem to be disconnected.
“And I’d argue that keeping the money in China would cause much larger losses than the 20-30% currency loss”
Could you pls explain this in a bit more detail. We don’t get it clearly but we get the feeling that you are on to something very important
CDB:
Foreign Currency Funding
Our funding sources for foreign currencies consist primarily of export credit facilities, overseas or domestic bond issues, international syndicated loans, and loans from foreign governments. Funding for foreign currencies is largely dependent on our lending levels. In 2003, we raised a total of USD 1.5 billion in foreign currency financing, of which, USD 500.0 million was raised through the domestic bond market and another USD 500.0 million from domestic borrowings. In addition, we purchased USD 500.0 million in the domestic market through foreign exchange transactions.
On September 28, 2004, we successfully issued USD 600.0 million in 10-year bonds in the US and offered Euro 325.0 million in 5.5-year bonds outside of the US. This global offering marked our re-entry into the global capital markets. Our last such offering occurred in 1999. In addition, this was the first time that CDB issued Euro denominated debt and we are only the second entity in China, after the MoF, that has ever issued such debt.
Both issuances were well received by international investors. The USD bond and the Euro bond offerings were oversubscribed by 2.5 times and 1.75 times, respectively. We succeeded in attracting close to 50% of the total subscriptions from large international institutions. We also managed to attract a diversified pool of investors including leading global banks, asset management firms and insurance companies. The success of our debt issuance overseas demonstrates the level of confidence that investors have in our track record of performance and our financial position.
On December 28, 2004, we successfully issued USD 500.0 million of debt in the domestic inter-bank market. Of this amount, USD 400.0 million and USD 100.0 million were in the form of 5-year floating rate bonds and 3-year fixed rate bonds, respectively. This represented the second time that we issued foreign currency debt in the domestic market since 2003. Like our international offering, our domestic offering attracted a range of investors including state-owned banks, joint stock banks, city commercial banks, insurance companies, securities firms and foreign bank branches in China. Both the 5-year floating rate bond and the 3-year fixed rate bond were oversubscribed by 1.5 times and 1.3 times, respectively.
Local Currency Funding
China Development Bank is one of China’s key bond issuers. In 2003, the total value of bonds issued by the bank on the interbank market exceeded that of T-bonds for the first time, reaching 420 billion yuan. In 2004, the bank issued bonds worth 360 billion yuan, including 320 billion yuan with maturity of one year or longer and another 40 billion yuan set to mature in under a year.
As of the end of 2004, the cumulative amount of bonds issued by the bank topped 2 trillion yuan to 2.0672 trillion yuan, with outstanding bonds valued at 1.265 trillion yuan.
As a major issuer on China’s bond market, the bank has long committed itself to cultivating the domestic bond market. In 2004, the bank forged ahead as an innovator, twice launching forward bonds with interest rates set through bidding and new floating rate bonds with 7-day repo as the benchmark. With approval from the CBRC and the PBOC, we issued RMB 20.0 billion in subordinated debt securities on December 24, 2004. This was the first time that a policy bank was able to raise its secondary capital, and thus improve its capital adequacy, through the issuance of subordinated debt in China. Through an open bidding process, we attracted key investors, such as China Life Insurance, National Post Savings, commercial banks and securities companies.
The bank has adhered to a multi-channel, highly efficient fundraising mechanism with financing based on bond issues at the core and other channels as supplements. It will continue to tap other sources of funds such as postal savings institutions, social security funds and insurers. In 2004, the bank continued to cooperate with the Postal Savings & Remittance Bureau in taking deposits and bond subscriptions on the principle of mutual benefit, and made the bureau a member of the underwriting group for CDB’s financial bonds.
We need to look at the similarity between a large corporation and the Chinese party state ends beyond the superficial level. The vitality of the US system is not dependent on the structure of individual companies — the important thing is that they compete against each other and however they are organized the weaker ones fail and get gobbled up. Now when a company grows so big as to become a monopoly we may get close to the Chinese analog.
“…Barclays and CDB have known each other for many years… “This is not a new relationship…” http://www.ft.com/cms/s/6e46e780-3949-11dc-ab48-0000779fd2ac.html
“…[CDB], which was created in 1994 to help finance Beijing’s development priorities, has provided backing for multibillion-dollar infrastructure projects like the Three Gorges Dam, the south-north water diversion project, and major ports…” http://www.nytimes.com/2007/07/24/business/24bank.html?_r=1&ref=business&oref=slogin
Mr. Yang: “…This is a Chinese reality that banks in Western countries cannot imagine. But, of course, this isn’t the whole cause of the problem. The problem of long lines has become even worse this year, which is closely related to the explosive growth of the capital markets. Banks are now selling wealth-management products, fund-management services, and third-party depository services for securities-account holders. Frankly speaking, banks are poorly prepared for this new trend, in terms of their thinking, human-resources organization, and the development of their systems. This is a deep-rooted problem…
Caijing: It seems that the kind of reforms you’ve talked about at ICBC will require fundamental changes, from its corporate culture to business structure and work flow. So where is ICBC planning to start?…
Mr. Yang: As foreign banks set up various new kinds of business in China, it undoubtedly creates competitive pressure for local banks…. one thing we have to admit is that our ROE… is a bit lower than others, because of the huge amount of funds we raised through our IPO. We need to further restructure our assets and profits.
Caijing: At ICBC overseas assets are no more than 3% of total assets. Will ICBC speed up its overseas expansion?…”
http://online.wsj.com/article/SB118296323246850260.html?mod=googlenews_wsj
Brad — Re: losses in keeping the depreciating dollar.
In the past year the yuan nominally appreciated steadily against the USD with a 5%/year rate. I think that China will keep this rate for many years. Then those who want to make a lot of money by betting on a yuan appreciation will get only a 5%/year return. That is not that much. Since China gets 5% interest on its US bonds, they don’t loose that much money by keeping a lot of depreciating dollar.
DC — “That system requires that the dollar continue to be linked to oil reserves, otherwise known as US Dollar hegemony. … and demand payment in dollars and only US dollars.”
But it does not necessarily mean that anybody who wants to buy oil must have a lot of USD in reserves. You can have euro in reserves and exchange it to dollar when you want to buy oil. The only problem is if there is noone who would give you dollar for euro. The real question is: why do the oil exporting countries ask dollar for their oil? I can more or less understand countries like Saudi Arabia, who (more exactly, whose sometimes corrupt and hated leaders) want to be friendly with the US. But why do Russia or Norway want USD for their oil? Why does Venezuela still want dollar? Wouldn’t it be a slap on the face to ask for Euro from the US? I read the other day that Russia is thinking about swithcing to euro in the oil trade. But why does it take so long? What does it take to switch from dollar? Just tell your clients that from now on you want euro instead of dollar, isn’t it? It is probably not, because otherwise why would it take so long for Iran to switch from
dollar to other currencies.
“…Last month, CDB announced it was forming a $5bn China Africa Development Fund to provide cheap financing to domestic companies investing in Africa, particularly in the oil and minerals sectors… “A large part of the rationale for CDB to invest in Barclays is commercial but it is also in line with the government’s encouragement of companies to invest overseas as a way of relieving pressure on the exchange rate and reducing domestic liquidity.”… Analysts say it is too early to tell whether CDB and Temasek have paid too much for their stake in Barclays, but… The nascent China Investment Corporation, established as Beijing’s own sovereign investment corporation to manage some of its foreign exchange reserves, has so far made a paper loss of $374m from its investment in the initial public offering of Blackstone… But with a mandate of at least another $197bn to invest, these short-term losses are not going to deter CIC officials in charge of spending the country’s treasure. Barclays and ABN Amro will almost certainly not be the last international banks with Communist party officials on their boards of directors.” http://www.ft.com/cms/s/6f25d094-3949-11dc-ab48-0000779fd2ac.html
“Barclays’ agreement with China Development Bank… gives Barclays a fallback position if it fails to win the bid for ABN by allowing it to sell its products in the fast-growing Chinese market…. CDB will also use Barclays Global Investors as one of its preferred asset managers. The two banks will also collaborate in commodities products where Barclays Capital… is already a leader in the field. Barclays is one of the biggest banks in Africa…” http://www.ft.com/cms/s/6d6dbf14-3949-11dc-ab48-0000779fd2ac.html
Steve Waldman 2007-07-23 11:52:04 — I liked your remarks vey much. For example the “straightforward return maximization under existing market conditions is not the primary driver of their policy choices”. I also think that many of China’s moves (sometimes not really understandable from a profit-maximizing economic point of view) are driven by strategic aims. One consequence of this is that they are difficult to understand if we think only in a few-year perspective. I have made the comment several times on this blog that it will take time for China to let the yuan fully appreciate, even if they loose money on the slow process, because their main strategic aim is to lift hundreds of millions out of poverty by creating export jobs. China already has a middle class of more than 300 million (more than the entire population of the US). Maybe it will take 20 years to add another 300 million. Is that aim worth more than the few hundred billion USD they loose in the meantime by piling up more and more USD in order to have a slowly and orderly appreciating yuan? Yes it is. My other example, I also mentioned on these pages is Taiwan. China lets Taiwan to run a big trade surplus with the mainland, while in the meantime it captures the other potential export markets of Taiwan. This way it makes Taiwan’s economy so dependent on the mainland, that when sometimes in the future it will be more difficult for the Taiwanese companies to export to the mainland, suddenly China will have many allies in Taiwan in its quest for a peaceful reunification.
If the past record is any guide to the future, the Chinese will primarily remain minority shareholders in foreign corporations. For instance, as the largest customer of Liquidified Natural Gas, China CNOOC retains a 10 percent ownership stake of the huge Gorgon energy reserves off the Australian coast. Other overseas resource investments in Brazilian iron ore, Venezuela oil production, and Canadian shale oil are in partnerships with indigenous governments and local businesses. The Chinese will absolutely NOT attempt a hostile takeover of the entire Barclays bank, but will remain strategic investment shareholders that will support long term capital growth plans by current British management.
Americans should be rest assured, the Chinese PBoC has also officially informed US Treasury Chief Hank Paulson that the Chinese government will NOT be attempting to make any strategic acquistions of any US corporations.
“With the news that energy companies such as Chevron, BP, ENI, and Enel are interested in participating in the upcoming auctions of Yukos assets, investors and shareholders are beginning to cry foul. The first major indication - a letter from California State Controller John Chiang to Calpers, California’s massive state pension fund, expressing concern over the group’s stake in Chevron and BP… Rosneft announced… that it has arranged a $22-billion (U.S.) loan to finance Yukos acquisitions. Its lenders include Barclays, Goldman Sachs and JPMorgan…” http://www.robertamsterdam.com/2007/03/investor_backlash_to_oil_compa.htm
Chinese behavior in unpegging the yuan makes more sense if you look at the fact that different economists argue that different things will happen with a floating currency.
HZ: Actually, Chinese policy has been to split up the state-owned enterprises so that they do compete against each other.
Dr. Dan: My point is that China doesn’t have a good internal mechanism for allocating capital. If you don’t put the money off-shore, where does it go? Into the stock markets or real estate? Anyone who is foolish enough to invest in Chinese stocks or real estate right now is looking at more than a 20%-30% loss. Corporate bonds? Undeveloped, and SOE’s are not lacking for investment money. Boost consumption? You’ll probably overheat the economy if you do that.
Right now moving capital overseas seems like the least bad thing for China to do.
$850 Billion Mortgage backed CDO’s now likely worth only $300 Billion
http://www.safehaven.com/article-8025.htm
Hit by US sinking subprime loans, the near collapse of Bear Sterns’ subprime hedge funds exposed investors to the harsh mispricing of the $850 billion mortgaged backed CDOs or collateralised debt obligations which back subprime mortgages. Rather a value of $850 billion, the underlying value of the CDOs on the books of the hedge funds, investment banks and insurers may be something less than $300 billion. Indeed, the mark-to-market losses exceed the capital of the big investment banks that underwrote the CDOs.
Those numbers for the total value of CDO’s and the actual mark to market value seem implausible to me. Where did they come from?
Also, there is a reporting bias in that you hear about situations when something goes bad, but not things to good. Hypothetically, if someone were to have seen that the sub-prime sector was a mess, put in the right bets, and made a huge amount of money from the sub-prime blow-up, they have no reason to talk about it.
agree with two fish — the losses seem a bit on the high side.
Re: RMB + 5% +3% on deposits/ gov bonds = 8% — and given that there isn’t much risk of a depreciation/ there isn’t a lot of volatility, it is the kind of bet that could be leveraged up if china had an open capital market … it is basically free money.
yen and vix are spiking, markets are pricing in an abe implosion sunday — cf. http://www.morganstanley.com/views/gef/archive/2007/20070706-Fri.html#anchor5142 — if he just manages not to and is able to put together a reform agenda (like he was supposed to) and yen slingshots higher… coupled w/ countrywide ceo — http://web.servicebureau.net/conf/meta?i=1112943903&c=2343&m=was&u=/w_ccbn.xsl&date_ticker=CFC — saying he’s seeing home price declines like in the depression and problems spreading to prime and existing home sales (+ inventories and prices) tomorrow… also note moody’s and mcgraw hill (S&P) are tanking, in my mind because half their revenues in the last year came from rating CDOs and conflict of interest puts them on the hook for, what’s known in the hedge fund world as, ‘legal arbitrage’…
“That system requires that the dollar continue to be linked to oil reserves, otherwise known as US Dollar hegemony. But everywhere the petrodollar is under attack. The only solution is to control two-thirds of the world’s remaining petroleum -which is in the Caspian Basin—and demand payment in dollars and only US dollars.”
If anything, China, Russia, Japan, and the Gulf Oil states are supporting the dollar hegemony by their large purchases of Treasuries, Agencies, and the like. By the way the Caspian Basin doesn’t hold anywhere near the 2/3s of the worlds remaining petroleum. Oil is a fungible commodity, all of those articles that claim the US is trying to fence in China on oil appear to be written by people unfamiliar with the oil industry. Even during the oil embargo of 1973 the US was receiving plenty of Middle East oil via third and sometimes fourth parties. (Read up on how Marc Rich and this period..) The so called oil for food program of the Iraqi government was compromised. All of the offshore drilling bans for Florida, California, etc.. will go away if you gasoline hits $10 a gallon in the US. If oil goes high enough, also, coal to liquids processing will become viable and profitable.
love the term legal arbitrage …