Brad Setser

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China’s Sovereign Wealth Fund

by Brad Setser
September 24, 2007

michael pettis

The Chinese sovereign wealth fund (which, following convention I will call the CIC) is expected to be approved later this month or early October, before the October 15 meeting of the 17th National People’s Congress.  Much of its expected structure, however, is known and it has already made one very big and visible investment, the $3 billion it invested in the Blackstone Group IPO, which value began falling almost as soon as the deal was launched.  As of last week the market value of the investment had declined by $600 million, causing a great deal of complaints and criticism in China, not all of it rational.  

The CIC has already been approved to purchase $200 billion from China’s central bank, the People’s Bank of China (PBoC).  The purchase will be funded by a RMB 1.55 trillion bond offering by the Ministry of Finance (MoF) with maturities of ten years or more.  Already about one-third of the money (RMB600 billion) has been raised, with all of the rest expected to come before the end of the year.  Given that China is accumulating reserves at the rate of $100-120 billion a quarter, it is probably safe to assume that if it is perceived as being successful (from the point of view of domestic political considerations, not investment performance) a lot more money will eventually be transferred into the CIC.

One bit of good news is that the PBoC plans to use these MoF bonds as part of its open market operations to control the expansion of the domestic money supply.  This is good news to me because I think the use of central bank bills, which is what the PBoC mainly has used in its ineffective sterilization attempts, has been pretty much a waste of time.  They are too similar to money and way too liquid to have much impact in draining China’s ocean of liquidity.  The less liquid MoF bonds should do a better job.  

Interestingly enough, the loss on the Blackstone IPO and the recent turmoil in the markets seems to have affected the CIC's investment strategy, as has the international outcry against non-transparent SWF's purchasing major strategic assets around the world.  During their meeting with German Chancellor Merkel's during her visit to China at the end of August, Chinese officials promised that the CIC had no intention of buying strategic stakes in big western companies.  In fact it seems that the original goal of the CIC – to maximize investment returns – has been put on hold.  This is probably a good thing because, it seems to me, the most valuable use of excess reserves is as a sort of stabilization fund that minimizes the changes in creditworthiness of the sovereign borrower.  Instead of maximizing returns – which is likely to be pro-cyclical and so will only increase volatility – the funds should be invested in ways that hedge Chinese risk, for example, by buying assets that perform best when conditions in China are likely to be at their worst, and vice versa.  

Unfortunately that doesn't seem to be the alternative strategy.  It looks like the management of the CIC's investments, perhaps not surprisingly given the size of the honey pot, is going to be the result of a hodgepodge of competing ministries and claims.  This is what Xinxin Li has to say about it (see the September 20 entry for my blog at for a more complete excerpt):  

A seven-person executive team has been formed, representing all the interested parties.  The Chairman of the Board is the vice secretary general of the State Council (China's Cabinet) Lou Jiwei, who invited the current deputy head of the National Social Security Fund (China's national pension fund) Gao Xiqing to be the CEO of the CIC.   The team also includes vice finance minister Zhang Hongli, the head of Central Huijin, Xie Ping, and a representative from the NDRC.  The PBoC is supposed to send a deputy governor to join the team, but the appointment is still pending.  A possible candidate is the current deputy governor Su Ning…This structure reflects the inter-ministerial nature of the CIC: it is not only a SWF seeking high investment returns, but a coordinator among different government agencies on China's overseas investment.  

This will be a pretty big agency.  It will have 1,000 employees once it completes its expected takeover of a couple of other agencies involved in the management of domestic assets, and it will be supervised by a representatives from the State Council,, the National Social Security Fund, the MoF, Central Huijin, the NDRC and the PBoC.  

Given that these different institutions have very different goals and interpret current conditions in China in very different ways, one can just as easily argue that the executive team is as likely to coordinate interests as to paralyze action. My concerns aren't allayed by the scope of the CIC's mission.   According to Li, “Central Huijin, the former investment arm of the PBoC, will be integrated into the CIC and continue to capitalize domestic financial firms. Another existing institution, China Jianyin Investment, will mainly operate in the area of managing domestic assets and disposing of non-performing loans.  In addition, the CIC will establish a new department for overseas investment.” It is also, apparently, expected to use its assets to fund the overseas expansion of domestic corporations.  It is hard to imagine that domestic political clout will not be at least as important a factor in deciding which domestic entities will be funded and on what terms as economic rationale.  

My guess is that the CIC will start out investing largely in liquid foreign securities, which responsibility will be handed off to SAFE (State Administration of Foreign Exchange, the body that is responsible for most foreign exchange transactions of Chinese state entities).  Given the recent turmoil in the markets and the criticism the CIC has received for the Blackstone investment, I suspect that its first investments will be fairly conservative, although a lot of people from different banks are telling the CIC that the market turmoil is an excellent opportunity for a cash-rich entity to find great bargains.  I don't think the CIC is buying the argument, but who knows?  Lou Jiwei is supposed to be a pretty sharp guy and depending on how damaging the Blackstone criticism has been to his career prospects, he may be eager to score a goal or two as soon as possible.

As the CIC grows, I would bet that an increasing amount of its assets is likely to be invested in strategic investments, which I suspect will include the financing of the foreign expansion of state-owned companies.  This may turn out to be the most highly politicized aspect of the CIC's future business.  


With $30-40 billion a month pouring into China's reserves, it wouldn't be surprising if a steadily increasing amount of money , either held at the PBoC or at the CIC, is invested in riskier assets and strategies than in the past.  It is a little too early to get a bead on exactly how and where this money will get invested, but certainly anything that lifts the fog that surropunds Chinese finances should help clarify the direction of the global balance of payments.  I will try to stay on top of rumors and facts about the CIC and PBoC investment strategies, and of course would appreciate comments from anyone that knows anything. 


  • Posted by Charlie

    I think this is a bad idea. There are many conflicts of interest that are going to arise from this.

  • Posted by London Banker


    Here in the UK we are seeing huge buying of infrastructure by Middle East SWF – with the current struggle between Qatar and Dubai for control of the London Stock Exchange being big news. This follows large investments in transport (Emirates airline and Dubai Ports World), tourism (more Brits holiday in Dubai than Florida since 2005), retailing and medicine.

    China seems more interested in investing in raw resource development – mining, gas, oil, refineries, steelworks, etc. As China moves up the value chain from manufacturing to service economy, this will probably impact their strategic investments. Do you see them following a similar path to the emirates, moving up the chain of strategic acquisitions into the service and financial economy?

  • Posted by Dave Chiang

    Well I think the Chinese will sooner or later have to write off a major portion of their holdings of US Treasury bonds as worthless in monetary purchasing power. The losses from the 70% estimated holdings of US Dollars is partially offset by gains in the 30% estimated holdings of Euros. But the inflationary printing press policies of the Bernanke Federal Reserve are not without cost to the American economy. Under the US Dollar hegemony regime, the exorbitant privilege of the US extends to exchanging essentially worthless greenback paper for foreign manufactured imports. Over the past decade, the trillions of dollars in McMansions, gas guzzler SUVs, and Flat Screen Hi-def televisions purchased on credit are non-productive assets that don’t produce any return on investment. The rest of the world doesn’t have to put up with this nonsense of the exchanging worthless paper for tangible products of “real” economic wealth. The Chinese are rapidly deploying their financial wealth for the acquisition of strategic raw materials in Africa, Latin America, and Central Asia. The latest example is the $5 billion Chinese deal to mine Africa’s Congo vast copper reserves. Other contracts in the works include Cuban Nickel deposits, Brazilian Iron ore, Canada tar sands, and Venezuela oil reserves. Unrecognized by the insular Washington Consensus, the third wave of globalization is already taking place with multi-billion dollar deals taking place between the developing nations of the world with any participation by the United States. Furthermore, inter-regional trade across Asia surpasses exports to the United States. And the 40% of Middle East trade with East Asia far exceeds the 10% of trade with the United States.

  • Posted by Qingdao

    Ni hao Michael: I don’t see how this gets them out of the fundamental dilemma of a falling $, falling $ interest rates; rising rmb, rising rmb interest rates, rising rmb inflation (10%?) and glacial movement on the rmb-$; am I missing something?

  • Posted by Guest

    re: “the third wave of globalization is already taking place with multi-billion dollar deals taking place between the developing nations of the world with any participation by the United States” …all still taking place in english…

  • Posted by Dave Chiang

    Guest, English is the world’s language for several historical reasons. First, British global hegemony 100 years ago when the sun never set on the British empire, spread the English language to every corner of the world. American global hegemony since World War II supported the English language, but the indirect strategic consequence of the Iraqi fiasco will be the Asian Century. Finally, the alphabet based English language is more user friendly with the global internet than character based Asian languages. That the world will continue its use of English for communication and commerce doesn’t negate the fact that the future of mankind is a multi-polar world order. The Beijing leadership seriously doesn’t pay any attention to the ritual insults from Thomas Friedman and other US journalists anyway. Chinese or Japanese will never be global languages but so what.

  • Posted by Guest

    Bernanke: The anti-Robin Hood

    By slashing the federal funds rate, the Federal Reserve chief robbed from the country’s future to give a gift to Wall Street. And a lot of ordinary Americans will end up getting hurt.

    The rate cut was no gift to Main Street, which lies outside the loop of crony capitalism. Long ago, the Fed abdicated its responsibility under then-Chairman Alan Greenspan. But now chief Ben Bernanke and the boys at the Fed have taken irresponsibility to a new level, where they have clearly demonstrated that they work for Wall Street — and when Wall Street says jump, the Fed asks, how high?

    Now the dollar will sink, and inflation will almost certainly rise. So while the Fed, in its role of bartender of last resort, can lower short-term interest rates, over time I believe that long rates will rise, as foreigners (and Americans) digest what last week’s Fed action means. Folks will recognize that inflation is not measured excluding food and energy, and will realize that inflation in this country is 5%-plus — which would argue for long-term rates in the neighborhood of 7% or 8%. Thus it has been left up to the currency and Treasury markets to discipline the Fed, which always takes longer and is always far more painful.

    Though it’s obvious the stock market benefited from the Fed’s action, it might not be quite so clear who will get hurt. Obviously, those on fixed incomes, like retirees, will be hurt. Children will be hurt, because they’re the ones who will have to pay for the incredible mess that will have to be sorted out at some point. And anyone old-fashioned enough to save money will be hurt.

    Of course, those who will benefit (for now), in addition to the extremely wealthy, are speculators. It seems the national pastime in this country is to speculate and lever up. And then, when one and two plans don’t work, demand to be bailed out. And by the way, your demands will be met.

  • Posted by black swan

    I want to echo what London Banker said about Dubai. I thought I was stuck forever with PWI, a Canadian Energy Trust that yielded over 12%, with a stock price that seemed to go nowhere, even as the price of oil went north of $80 a barrel. That changed today. Dubai just bought it and pushed the stock price up 30%. If DC is correct about the Chinese internationally buying raw materials producers and land, then prices of natural resource stocks should benefit from sovereign fund buying competition.

    The CIC has probably learned from its Blackstone purchace, that playing fan-tan with sovereign funds will not be received warmly by the Chinese people. One would think, with all the present and future problems China has,and will have, with its agriculture, that it would be buying up agricultural processors, land and companies worldwide.

  • Posted by Guest

    Helicopter Ben Earns His Wings

    Our economy is on the brink of disaster because irresponsible Fed policy encouraged Americans to borrow and spend too much and created an unprecedented national real estate bubble. The last thing the Fed should do is entice Americans to borrow more money they cannot repay, buy more imported products they cannot afford, and attempt to blow more air into the deflating real estate bubble.

    Unlike previous bouts of Fed easing, this time any additional liquidity will not artificially pump up the economy or the housing market, but merely accelerate the rise in consumer prices and eventually push up long-term interest rates as well. If Americans are having problems making mortgage payments now, think of how much more difficult the task will become when food and energy prices double.

    The irony of the situation is that on September 11th, while in Germany, Bernanke delivered a speech in which he admitted that we need to increase our savings and declared that the inevitable adjustment to our current account deficit would have both real and financial consequences. Bernanke’s actions, which reward borrowers and punish savers, merely exacerbate those imbalances, ensuring even greater consequences when the inevitable adjustment finally occurs.

  • Posted by gillies

    markets are made by the coming together of people with different needs and different views of the future. the day’s trading and thus the day’s prices and indices are created by buyers and sellers. the need is not for the CIC’s dealers to reach consensus – consensus would create maximum volatility – the need is for responsibility to be diversified. it would be ridiculous to take a vote and put all the cash into one company or asset. likewise it would be ridiculous to invest all the money according to one opinion, even if this were that of a committee of many.

    dave chiang – is the dollar really worthless paper ? that’s interesting. post me $1000 and give me a couple of days to check out this theory. thanks.

  • Posted by Guest
    Meanwhile in the United States, the Fed cut interest rates, thus causing a massive Wall Street stock surge, undermining the value of the dollar, sending gold up to $740 per ounce and doing very little to help the home mortgage borrower since long term rates rose almost as much as he had cut short term rates — unlike Fed Chairman Ben Bernanke, the bond market fears inflation. Then their regulators allowed the overleveraged and accounting-inept housing agencies Fannie Mae and Freddie Mac to buy another $20 billion of mortgage backed securities, to the further ultimate risk of the taxpayer – Freddie promptly snapped up CIT’s $4 billion portfolio of securitized subprime junk, precisely the rubbish that puts its solvency in most jeopardy. Finally Bernanke appeared before Congress and supported legislation allowing Fannie Mae and Freddie Mac “temporarily” to guarantee “jumbo” mortgages above the current statutory limit of $417,000.

    The idea that large mortgages should be effectively government guaranteed beggars belief in principle. It also supports the overbuilt high end of the housing market, bailing out borrowers who, being richer, should be more able to bear the risk of lower house prices and higher interest rates than their poorer countrymen. It is a subsidy from the middle class to the rich, supporting the least productive, most energy-inefficient and least deserving sector of the US economy. John Edwards, he of the $400 haircuts and the 28,000 square foot home, is no doubt rejoicing at the news.

  • Posted by HZ

    I think it is an excellent idea to use US C/A deficit as a proxy for the liquidity measure. I have been doing that personally as well.
    In a way it is probably better for CIC to lend to corporates and banks that it has an interest in investing in than to invest in the equity directly. It can a better spread and if it is actually interested as an equity investor, credit risk is not a concern either — so it gets the spread for free. And there shouldn’t be any political issue.

  • Posted by Guest

    From People’s Daily, 57 percent of China GDP still state-owned

    Last year, total assets of these 160 or so state monopolies and oligopolies amounted to a stunning 12.20 trillion yuan ($1.6 trillion), or about 57 percent of the country’s GDP. In addition, they generated 720 billion yuan ($95 billion) in earnings, half of which were made by the three oil giants alone. Up to 80 percent of the year-on-year increase in profits realized in 2006 by all Chinese enterprises were attributable to longduan or monopoly firms in the areas of oil and petrochemicals, electricity, coal, and metals (People’s Daily, January 6; Xinhua, March 18). Thanks to their cartel-like powers, these firms are also least affected by the rise in costs of raw materials or energy.

  • Posted by Twofish

    In 2000, there were about 150,000 state-owned enterprises in China, and part of the massive industrial restructuring has been to change the 150,000 tiny SOE’s into about 150 reasonably sized companies. This involves closing down large numbers of the small ones.

    Also, the term “monopoly firm” doesn’t make any sense. The only major monopoly that remains is the tobacco monopoly. There are industries in which state owned firms make up 90% of market share, but in those the SOE’s are intended (and do) compete with each other like private firms in the West. You might be able to argue that oil and petrochemicals have something of a defacto monopoly, but that doesn’t work in the case of coal and metals, many of which are controlled by province and local governments.

    One other thing, it’s really really important when citing something to make it clear what the People’s Daily says, and what is your commentary on the People’s Daily.

  • Posted by Twofish

    To the Bernanke bashing crowd: What would you see in six months to a year, that would convince you that Bernanke was right?

    My prediction is that within one year, we would have largely forgotten about subprime mortgages. At that point, I bet you all will say “oh wait, yes he’s avoided that disaster but at the cost of this *EVEN BIGGER* mess.” Trouble is that this can continue indefinitely. You can say that for the next 100 years.

    So is there anything that you could see in the next year or so, that would convince you that your models are flat out wrong? (As for me, if you see 20% CPI then I’m wrong.)

  • Posted by London Banker

    @ Guest,

    It is a question of degree, not kind. Government spending in the USA is equal to 36.4 percent of GDP and the government derives 4.8 percent of revenues from state-owned companies and property. The USA in some ways has a more concentrated, more dangerous, self perpetuating elite. Social mobility has been declining for the past two generations and relative poverty increasing.

    So which country is the model for success? For freedom? For prosperity? Maybe neither.

  • Posted by Guest

    re: “is there anything that you could see in the next year or so, that would convince you that your models are flat out wrong?” well you could sort of just take the opposite view; if the 10-yr TIPS spread is ‘contained’ (say below 2.5%)

  • Posted by black swan

    I think that philosophically, the Chinese leadership would like every citizen to have a piece of the pie. On the other hand, most investment vehicles in the US reward the pump and dumpers. The US economy no longer rewards the individual wage earner, saver or long term inverstor.

  • Posted by Qingdao

    black swan
    I think that philosophically, the Chinese leadership would like every citizen to have a piece of the pie.
    Governments at all levels combined spend only 3% of GDP on health, education, welfare and pensions.

  • Posted by qingdao

    I just read that these bonds will pay 4.46%; official inflation is 6.5%; my friends tell me 10%

  • Posted by Michael Pettis

    London Banker and Black Swan, I suspect you are right, and I do think it makes sense for the CIC to use its assets as an economic hedge, by buying assets whose values move in the opposite direction to their economy – most obviously commodities – but I am more pessimistic than most that China can move a whole lot further up the value chain very quickly. Contrary to what is written in the press, the educational system here is extremely poor, and is especially bad at training the most intelligent of its students.

    Qingdao, I guess I am a little bit of a pessimist here, at lest in the short term. I do not see how China gets out of the problems you mention without a major revaluation of the RMB followed by a credible peg, and if you then point out that this brings huge risks, I could only agree.

    HZ, I think the CIC may be under a lot of pressure to show good returns. In the short term, that means earning enough in dollars to make up for the appreciation of the RMB. My guess is that they will certainly buy lots of bonds, but they will need to juice up returns with equity and commodity holdings..

    Black Swan, if you think most investment vehicles in the US reward pump and dumpers, welcome to China. I am afraid this country is a lot more interesting, messy and difficult seen from inside than it looks from the outside, and when it comes to fraud in marketing and investing, you would have to go back to the US in the 1860-90s to see its match (recently a couple were arrested for selling millions of dollars of, yes, snake oil). There is a widely held presumption in China that every rich man is a thief – I just came out of a session with a bunch of my Peking University students who are interested in finance, and one young man told me that he would hate to go into private banking in China because he would not want to be associated with so many thieves. I don’t agree, of course, but given how so much of the money was made in the last two decades, it is not surprising that everyone believes this.

  • Posted by twofish

    One thing that amazes me is that the first thing that Chinese people ask when they find out that I work in a financial institution is whether or not I have any inside news on stocks. 1) I don’t. 2) Even if I did I wouldn’t tell you because it’s not good for society. 3) Even if I didn’t care about society, I don’t want to end up in jail, and securities regulators in the United States have the means and the ability to make your life a living hell if you break the rules…..

    There is a whole set of financial and legal infrastructure that exists in the United States and Hong Kong that doesn’t exist in mainland China. This is one big reason that the best Chinese companies want NYSE or HK listings. No one in mainland China trusts the mainland Chinese financial institutions (banks excepted to some degree) and regulators, and having the SEC and a big four accounting firm give its stamp of approval certifies that company as “not being run by crooks.”

    This is one huge reason I think that talk of the end of the United States is total non-sense. The United States has over a century of experience on how to run and how not to run large bureaucratic financial institutions. That knowledge will make it over to China, but it takes decades to create these institutions in China.

    The good thing is that the Chinese leadership realizes this, and one other good thing is that Chinese have different attitude toward time than Americans do. You tell an American that something will take two years, and they can’t handle that, which makes it difficult to do anything like building a nation (see Iraq). You tell Chinese that something will take a hundred years, and that’s no time at all.

  • Posted by Twofish

    London Banker: Social mobility has been declining for the past two generations and relative poverty increasing.

    I’m actually not sure that this is the case. One thing about statistics on social mobility in the United States is that I don’t think that they account for new immigrants. So it could be that people are on the escalator, but there are new people constantly arriving at the bottom.

    In any case, the notion that the United States is a nation in economic and social decline is not what I’m seeing.

    London Banker: So which country is the model for success? For freedom? For prosperity? Maybe neither.

    It’s a very, very bad idea to hold any country as a model. Every country has good points and bad points. The United States has excellent schools, wonderful financial institutions, an excellent constitutional system of government, and relatively open immigration. On the other hand, it also has a horrendously bad health care system and there is a large amount of naiveness about how the world works.

    Sometimes the same trait can be a good thing and a bad thing. Americans tend to be extremely impatient “get it done now” people. This is sometimes a good thing. This is sometimes a bad thing.

  • Posted by Dave Chiang


    “securities regulators in the United States have the means and the ability to make your life a living hell if you break the rules…..”

    Dave – Reply:
    That depends upon your political position in the United States which isn’t all that much different than China. Haliburton was awarded no-bid, sole source contracts for the support of the US military in Iraq due to VP Dick Cheney. Citicorp’s Robert Rubin pressured the US Bond Rating agencies, S&P and Moody’s, not to downgrade Enron bonds even when it was clear the corporation was facing serious financial and criminal issues. And finally, for a couple of million dollars in political campaign contributions, President Clinton pardoned convicted criminal fugitive Hedge Fund manager Mark Rich. Instead of spending time in jail for criminal racketeering, Mark Rick enjoys his life in the Swiss Alps with his criminal record erased.

  • Posted by Twofish

    To DC: You are picking isolated incidents and missing the system. The fact that you talk about the same incidents and the same people over and over is a sign that there just aren’t many of them.

    First of all, Rubin and Paulson are people who I think can be trusted with power and authority. By directing your attention at them, you are missing people like Cheney, who I think is one of the most dangerous people on the planet. Part of the reason I blog as much as I do is that I regret not talking more about *how* Cheney is dangerous.

    Second, even if you do eventually beat the charges, the SEC can make your live a living hell while you are trying to beat the charges. Once you are under the microscope, you are looking forward to several years spending most of your time and money dealing with lawyers, which is a very unpleasant experience.

    Also Marc Rich got his money in metals trading, he never had anything to do with hedge funds as far as I know.

    My experience has been is that its not the “Dr. Evil” types that are the really dangerous people. It’s people like Cheney who think and can convince other people to think that they are a lot more competent than they really are.

  • Posted by Guest

    Booming Profits from China’s State-owned Enterprises

    According to official statistics, China’s state sector made a total 1.22 trillion yuan (US$157 billion) of profits in 2006, of which 754.7 billion yuan or 62% came from the 155 central SOEs invested in by the central government and directly under the supervision of the State-owned Assets Supervision and Administration Commission.

    Some 69% of the 754.7 billion yuan profits of the central SOEs in turn was contributed by nine in the state monopolized industries – PetroChina, SinoPec, CNOOC, China Mobile, China Telecom, Baosteel, China Shenhua, China Aluminum and the State Grid. (Some of these listed companies do pay dividends to their shareholders. The proportions for the state, the controlling shareholder, however, have been pocketed by their parents.)

    In the first half of this year, profits of the state sector totaled 753.5 billion yuan, up 31.5% from the same period of last year, of which 541.8 billion yuan or 72% came for the 155 central SOEs. This does not even include the profits of the approximately 1,000 cigarette companies across the country under the State Tobacco Monopoly Administration.

    According to interim financial reports, Hong Kong-listed oil giant PetroChina reaped 81.8 billion yuan in net profit. China Mobile, the world’s largest mobile-phone operator in number of users, reaped a daily profit of about 200 million yuan in the first six months of this year.

  • Posted by Dave Chiang


    Oh please, over the past decade, there has been serious criminal conduct at numerous Fortune 500 Corporations. To name just an infamous few includes Enron, Tyco, MCI-Worldcom, Fannie Mae, Freddie Mac, Sunbeam, etc. VP Cheney has been accused of cronyism and nepotism, but to my best knowledge, criminal charges have never been filed against Haliburton, whereas Robert Rubin was closely associated with the Enron executives charged with federal criminal offenses. Citicorp which structured many of Enron’s illegal tax shelters isn’t lilly clean, but paid several billion dollars in penalities to have federal criminal charges dropped. And for the massive collateral damage caused to Southeast Asia in the late 1990’s from Wall Street hedge fund currency attacks, Robert Rubin is a man never to be trusted. In Japan, Robert Rubin is nicknamed “the bandit” by senior Ministry of Finance officials which at one time even revoked Citicorp’s banking license in Japan for illegal conduct.

  • Posted by Estragon

    Twofish – “So is there anything that you could see in the next year or so, that would convince you that your models are flat out wrong?”

    If I had to pick one thing, it would be the US current account deficit eliminated without pain.

    I thought the housing related debt issues would be a catalyst for a restructuring of US output towards tradables. Maybe the rate cut will smooth the transisition without untoward side effects, in which case I’m wrong. The rate cuts may only delay the restructuring though, so while the c/a deficit is broadly where it is now, the jury’s still out.

  • Posted by Twofish

    And the fact that there are criminal investigations for this sort of thing means that the system is more or less working. The accounting irregularities and insider information issues that mainland China has are far worse than anything that you see in your typical US-based corporation. There are good people in China trying to make the system better, but it takes a lot of time and effort, but the securities regulators are just overwhelmed. And setting up a regulatory system is difficult because you can end up overregulating. Most of what goes for “corruption” in Washington DC is just “gotcha journalism.” People using technical violations of the rules to destroy their political opponents.

    As far Cheney. You are right. Cheney has done nothing illegal. He is a nice well-meaning person that is extremely dangerous, because he is naive about the world. It’s not the evil criminals in the world that cause the big disasters, it’s the people that think they know more than they do, and focusing on “criminal conduct” and “corruption” misses where the real danger is.

    The people that caused the Asian economic crisis have a lot to answer for, but here I don’t think that Rubin gets much of the blame. More of it can be directed at the IMF for promoting stupid economic policies.

    Never mistake incompetence for malice, since incompetence is far more dangerous…..

    I’d much rather have a government run by competent thieves than incompetent angels, since the competent thieves quickly realize that they make more money and power “doing the right thing” and that by changing the laws and spreading a little of the money around, that they end up making more money. The incompetent angels take the power and end up destroying themselves and the people around them.

  • Posted by Guest

    Twofish – hope you are being sacastic about Cheney being naive.

  • Posted by Twofish

    To Guest: Cheney was naive in a dangerous way. He can do basic administration well, but he has no concept of how to run a business much less run an economy. He has just enough political aptitude to get himself into a position of power, but then no idea on how to use it. The good news is that he has shot himself in the foot so badly that no one even in the Republican Party will touch him. The bad news is that he helped get the US into a mess that will take at least a decade to extracate itself from.

    I have first hand experience with Halliburton and it is a far scarier place than the conspiracy theorists imagine, not because there are secret meetings to take over the world (I wish there were), but because of how badly the company is at anything that doesn’t involve pouring concrete.

  • Posted by hammerhead

    Twofish, you must live in a parallel universe. Cheney almost bankrupted Halliburton as its CEO, but Halliburton’s profits are up over 600% since Cheney became VP. Do you think Halliburton’s highly lucrative no-bid contracts, slap-on-the-wrist asbestos settlement and a government hands off policy on Halliburton’s Iraq war corruption over the last seven years are coincidental to Cheney’s serving as VP? If you do, then Bush has got some Harkin Oil stock to sell you (or would you prefer some Aloha Petroleum stock?). This honest Administration showed its true colors almost immediately. I believe this NYT article crystalized the Bushco attitude early on:

    Cheney “is a nice well-meaning person”. I’m sure the 3 million displaced Iraqis, families of the close to one million dead Iraqis, families of the over three thousand dead, and over twenty thousand wounded US soldiers would certainly agree with you. Additionally, Dick Cheney was so willing to show his honesty in his Enron dealings, that he fought like a tiger to keep his early meeting with his “energy advisor taskforce” secret. Cheney and that committee sure came up with a great energy plan. Since the Iraq war, it has worked beautifully for the large oil companies, for which the American people are greatful.

  • Posted by normansdog

    ” He (Cheney) is a nice well-meaning person….”

    stick with talking about equities and interest rates mate, as your grasp of politics is seriously Alice-in-Wonderland.

  • Posted by Twofish

    Oil companies are making gobs of money because of the run up in prices, and the amount that Halliburton is making is *terrible* compared to any of its competitors.

    hammerhead: Do you think Halliburton’s highly lucrative no-bid contracts, slap-on-the-wrist asbestos settlement and a government hands off policy on Halliburton’s Iraq war corruption over the last seven years are coincidental to Cheney’s serving as VP?

    Yes, since if you look at any other major oil company or construction company they basically get the same deal. You have money to hire lobbyists and lawyers to play the game.

    It’s not the Halliburton has some special deal with the government. It’s that *all* of the oil and big government contractors basically get the same deal. If would be the same if Cheney were not VP. Gore would have made more or less the same deals, because at the end of the day, people need concrete poured, and they want their SUV’s.

    You really think that things would be that different in the world, if Bechtel got the contracts rather than KBR?

    Lobbyists, lawyers, contractors, all in a tight little circle of power trying to get a hand at the government gravy train. That’s how the system works, and if Cheney were just some sleazy operator trying to make a quick buck at the taxpayers expense, that wouldn’t be much of a problem since he would know better than to *START A WAR TO ADVANCE DEMOCRACY*.

    hammerhead: Cheney “is a nice well-meaning person”. I’m sure the 3 million displaced Iraqis, families of the close to one million dead Iraqis, families of the over three thousand dead, and over twenty thousand wounded US soldiers would certainly agree with you.

    It’s amazing the amount of damage that nice, well-meaning people can do, which was my point.

    If Cheney was some sleazy operator, then what he would have done was to cut a quiet deal with Sadaam, quietly make money from Iraq, and then get sanctions lifted. That is what they’ve done in Iran, and what they’ve done in Libya…….

    I said that Cheney was nice and well-meaning. He also was extremely dangerous *because* he is nice and well-meaning. Give me a sleaze ball, corrupt political operator any day. They know better than to think that they can rebuild a nation in their image.

    hammerhead: Dick Cheney was so willing to show his honesty in his Enron dealings, that he fought like a tiger to keep his early meeting with his “energy advisor taskforce” secret.

    Which shows you how politically inept Cheney is. Any real deal can be made without it ending up front page news. Don’t bother with an “energy task force”, just have a round of golf, and talk about legislation over drinks. Those type of deals are made every day. That’s how the system works. The nice thing is that it’s open season. Big oil writes its checks to get access to congressmen. The Sierra Club, Greenpeace, and Amnesty International can get its members to write checks to hire lobbyists to do the same. Just play the game to get what you want…..

    About 90% of what you see on TV news and read in the papers was planted by some group or another trying to play the power game. All the big stories and the real deals, they never make the news, because there aren’t any glossy pictures. You can find the real stories, but you have to do some digging on your own. Look up committee transcripts, read the Federal Register, attend think tank conferences. Learn to read a balance sheet or corporate annual report. Don’t trust what the media tells you. Don’t trust what *I* tell you since I have my own weird agendas. Think for yourself….

    hammerhead: Since the Iraq war, it has worked beautifully for the large oil companies, for which the American people are grateful.

    They are no longer oil companies, they are “energy companies.” The big “energy companies” have figured out that there is going to be large future in hydrogen, solar and wind, and they want to dominate that. Tax breaks for wind power, and hybrids, all that talk about green energy, you do know who is behind that, do you????? If the future is solar, then Exxon-Mobil wants to dominate solar. If the future is limits on greenhouse gases, then BP Amoco is going to figure out a way from making a buck from that.

    But the Iraq war has been a total disaster for oil companies. There are barrels and barrels of black gold sitting there that they can’t touch because the pipelines are going to get bombed and you can’t move from point A to point B without getting shot at. You can’t do business in Iraq, because there is no one to make the deal with….. It’s such a mess that you can’t even bribe someone…..

    Right now, lots of Western oil companies are quietly making money in Iran. I pray to goodness, that big oil will keep the Bush administration from doing something even more stupid there….. Lots of Western companies making money in China. God bless them, because they help to stop a war that would have been infinitely more destructive than the Iraq mess…..

    I should point out that before I went into finance, I was in the oil business so I got to see this all first hand……

  • Posted by Guest

    London increases forex dominance
    London’s dominance of the global foreign exchange market continues to grow sharply as the share of New York and Japan slips, a survey has revealed

    Chinese buy into conspiracy theory
    Waterloo, Adolf Hitler and the Asian financial crisis, a far-fetched Chinese best-seller claims all are the result of the Rothschild family’s continuing control of money supply

  • Posted by guest

    Cheney is living the American dream. With the exception of the 10 years he spent as CEO of Halliburton, running the company into bankruptcy, he spent the rest of his life in public office. So, if the system isn’t rigged, how did Cheney acquire liquid wealth of over $900,000,000? Twofish, you work in a “financial institution”, so how was Cheney able to amass that kind of wealth having worked in public office almost all his life? What’s his secret? Did he do it “with a little help from his friend”, or did his friends have a little help from him?

  • Posted by Anonymous

    It’s hard not to savor the juxtaposition of two news stories: one pegging Vice President Dick Cheney’s net worth at just under $100 million, and one in which Cuban President Fidel Castro vehemently denies Forbes’ claim that he’s personally worth $900 million, placing him 7th on the magazine’s list of the world’s richest “Kings, Queens And Dictators.” (The list was topped by Saudi King Abdullah’s oily $21 billion.)

    As Mel Brooks said, “It’s good to be king.” (And, apparently, it ain’t bad to be VP either).

    The biggest assets in Cheney’s portfolio were mutual fund holdings in the American Century International Bond Fund and the Vanguard Group’s Short-Term Tax-Exempt Fund Admiral Shares, each worth between $5 million and $25 million. You can buy a lot of HazMat suits and salty buffalo steak with that.

    Cheney also owns Ballintober, a nine acre waterfront estate in St. Michaels, Maryland that he bought for $2.7 million in September. (Maryland must be very “in” among the rich and powerful these days. Don Rumsfeld also has a place in St. Michaels, while Equatorial Guinea’s President Teodoro Obiang Nguema Mbasogo and his immediate family have two multi-million dollar homes in the Terrapin state).

  • Posted by black swan

    Twofish said: “But the Iraq war has been a total disaster for oil companies.” So were those record profits made by big oil companies a disaster (in the case of Exxon, the largest profit in by any company in history), or were they just lying about them?

    Twofish said: “You really think that things would be that different in the world, if Bechtel got the contracts rather than KBR?”

    Twofish, I can only hope the financial company you work for does not employ you as an analyst. How could you have missed this?

    In April 2003, the U.S. Agency for International Development announced that Bechtel won a cost-plus-fixed-fee contract worth up to $680 million to rebuild Iraqi infrastructure such as schools, roads and sewers, as well as perform “institutional capacity building” to maintain the improvements and create “roadmaps for future longer term needs and investments.”

    “According to a company spokeswoman, Bechtel has awarded 102 of 140 subcontracts to 90 different Iraqi companies. Iraqi companies are tasked mainly with rehabilitating schools, but also with repairing bridges, power transformers and rehabilitating the Baghdad airport.”

    Twofish said: “If Cheney was some sleazy operator, then what he would have done was to cut a quiet deal with Sadaam, quietly make money from Iraq, and then get sanctions lifted. ”

    Did you mean like the “sleazy operator” George Schultz, or the “sleazy operator”,turned neocon warmonger, Donald Rumsfield? When Cheney and Rumsfield were unsuccessful with the carrot, they use the stick (“shock and awe” rather than shlock and gnaw). Is this what you mean by sleazy?

    “By far the most influential hire, however, was George P. Shultz. After leaving the Nixon administration in 1974, where he served as Treasury secretary, Shultz joined Bechtel as its executive vice president. Shultz suspended his association with Bechtel when appointed secretary of state by President Ronald Reagan in 1982. In 1983, Shultz dispatched diplomatic envoy Donald Rumsfeld to meet with Iraqi President Saddam Hussein to advocate for construction of a pipeline running from Iraqi oilfields to Jordan’s port of Aqaba.”

  • Posted by Twofish

    Exxon-Mobil has record profits, but if Iraq were online, they’d be making even more money. China and India are increasing demand for oil, and the oil companies are making large amounts of money off of this. This puts big oil on the side of China. The whole Chevron-CNOOC thing, that was a bit of hardball.

    to guest:

    You left off a zero. Cheney’s assets are about $90 million, most of which came from options he had in Halliburton stock. Funny thing. Once he was VP, people wanted him to sell his Halliburton stock, which he did, right before the stock plumetted.

    Halliburton made about $13.5 billion of revenue. US$90 million net worth for a CEO of a Fortune 500 company is typical (and I think it’s actually on the small side). One problem with the US system is that because public official salaries are capped, all of the really talented people try to go into business or law, and having talented people go into business rather than government makes things unbalanced. The Goldman-Sachs model, where people make money then run for office, is one way of getting around that problem.

    Also, once you make about $3 million/year and have about $10 million net worth, (i.e. managing director level at a bank) money no longer matters. Above that level, it’s not about the money. It’s about the power and the status.

    guest: Did you mean like the “sleazy operator” George Schultz, or the “sleazy operator”,turned neocon warmonger, Donald Rumsfield? When Cheney and Rumsfield were unsuccessful with the carrot, they use the stick (“shock and awe” rather than shlock and gnaw). Is this what you mean by sleazy?

    Yes exactly. If it was just about money, there are lots of deals that could have been made with Sadaam. Lots of deals *were* made with Sadaam. The whole “oil for food” sham.

    Cheney and Rumsfeld went wrong when they stopped being sleazy operators and got convinced by the neo-conservatives that they could build a democracy in Iraq. If it’s about money, you can make a deal. Go to Sadaam, ask him what his price is. $1 billion? $2 billion? $10 billion? $50 billion? $100 billion? Write the check and then have the lawyers and lobbyists make sure it is all legal, and the PR people make sure that the story gets buried in the press.

    If they were just in for the money, then they wouldn’t have gotten the US in nearly the amount of trouble that they’ve gotten. The US is going to be dealing with the Iraq mess for *at least* the next decade. Realistically, the next two or three. Everyone with half a brain knows it, but no one is talking loudly because they don’t know what to tell the spin doctors to say.

    But I still think that the US has a good economic and political system. The thing I find interesting about ideologues on both the right and the left is that they are interested in “selling democracy” but what they are trying to sell is some system that exists only in their minds, and not some real world system.

    The basic reality is that people with money get power, and people with power get money. If you try to build a political or economic system that ignores that fact, you are ignoring basic human desire and emotion, and what you come up with will be a mess. However, you can build a system that acknowledges human desire and still manages to do social good. Arrange things so that the people with money have to spread some of it around to get more money. When people complain about corruption, they usually are just upset that they aren’t getting any of the good stuff. Give it to them.

    When I say that I think that there are some parts of the US system that China should adopt, I’m talking about the real world, not some imaginary system. Even with the spin doctors, the lobbyists, the lawyers, the overpaid incompetent CEO’s, there is still a lot of good stuff in the US economic and political system. With all of the damage that Cheney and Bush have done, it’s still recoverable. Not anything like the Great Leap Forward or the Cultural Revolution.

  • Posted by Vikram Rout

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  • Posted by Guest

    This article is featured on the front page of The Issue today (Nov. 6) in the Issue of the Day section. Check it out if you get a chance, and let me know if you have any questions.

    Stephen Puschel