6% of Bear Stearns a day
6% of Bear Stearns a day. That is basically what the US has to sell to China to finance its current account deficit right now.
Not 6% of Bear ($1 billion) every business day. 6% of Bear every single day of the year. Financing the deficit requires selling more like 10% of Bear ($1.5 to $2b) every business day.
We don’t really have good data on the true scale of China’s foreign asset accumulation in q3 (China hasn’t indicated how much money it shifted to the CIC/ how much money Chinese firms took out of the country), but a reasonable estimate for China Inc’s total foreign asset accumulation in 2007 would be about $500b. If old trends hold, about 70% of that goes into dollar assets – a bit more actually, as China has to offset the impact of the euro’s rise if it wants to keep the dollar’s share of its portfolio constant. That works out to around $350b a year.
Or to put it a bit differently, China, Inc bought about 6% of Bear (with the option for a bit more) and 10% of Blackstone and still has about $346b left over to buy other US assets — as well as plenty of additional funds to invest in Europe.
Actually, the Bear-CITIC deal is structured as a swap, so there is no net flow. PrefBlog argues that Bear provided CITIC with vendor financing it needed to buy a stake in Bear, but it could equally be said that CITIC provided Bear the vendor financing needed to buy a stake in CITIC. CITIC and China have lots of spare cash; Bear and the US not so much.
I already have noted – back when the China Development Bank bought a significant share in Barclays’ – the irony in China Inc's close ties with the the uber-capitalists in the Street and the City. CITIC is, after all, a true red chip, founded by a party princeling. Wall Street goes where the money is. Right now, it is in the hands of the state capitalists.
CITIC's stake in Bear, though, does put China's various complaints about hedge funds in a new light. China, Inc now owns a rather large prime broker, and thus potentially stands to profit from more, and more aggressive, hedge funds.
Perhaps even more interesting is what this deal suggests about China’s changing attitude toward foreign investment. It used to be the case that financial firms looking for access to China needed to put money in China. Jon Anderson of UBS has noted that Chinas never has been all that open to foreign purchases existing Chinese assets, only to new greenfield investment that added to China’s capital stock.
China thought did initially welcomed strategic investments in China’s big state commercial banks. But China now seems to think (not incorrectly) that it gave the foreign investors a bit too good a deal. Goldman and Bank of America are sitting on huge gains for supplying China with funds that in aggregate it doesn’t need – and perhaps bundled together with some of the financial expertise that China wants.
Now though the terms seem to be changing. Getting access to China’s market may no longer require putting money in China. It may instead requires accepting investment from China.
I suspect China regrets not asking for a stake in Goldman in return for Goldman’s stake in ICBC, and a stake in Bank of America in exchange for Bank of America’s stake in China Construction. By linking investment in China to accepting investment from China, China can leverage the desire of many firms to get a toehold in China to gain political support in the US and Europe for China’s own desire to invest more of its own funds in higher-yielding assets abroad.
It is part and parcel of “reverse globalization.” China doesn’t particularly need Wall Street’s money. Wall Street, on the other hand, increasingly wants a cut of China’s money.
“China doesn’t particularly need Wall Street’s money” - really?
re: “party princeling” - if you may also have been thinking about this: http://www.brookings.edu/articles/2007/1017china.aspx
China’s purchases of dollar assets are not sustainable. In fact, China decreased its Treasury holdings by $8.8 billion (2.2%) for the last available reporting period.
Not to mention the wild and woolly printing presses blasting away to protect bubbles and financial institutions. Market capitalism at its finest.
Careful on the fall in Treasuries. China is buying a lot of agencies, which are a close substitute — and has been building up its cash balances pre-CIC. Plus, a lot of the increase in London’s treasury holdings is likely indirectly Chinese purchases (London down, china up is a consistent pattern in the data revisions)
Does the interest paid after the 9 trillion federal debt appear in the federal budget in some way? If not, then the small and falling budget deficit numbers are somewhat misleading.
Interest is part of the budget, though the interest paid on the Soc sec trust fund bond is reinvested back in the treasury market and thus doesn’t have an impact on market borrowing.
it’s a tad disingenuous to say the US has reduced its fiscal deficit per chinn’s chart http://www.econbrowser.com/archives/2007/10/in_updating_a_g.html - “the out-years (still) look pretty grim”
Dr. Chinn is correct to point to the out years, but there is no doubt that net treasury issuance has fallen quite significantly since 03/04.
re: “CITIC and China have lots of spare cash…”
“…Middle-income countries accounted for more than half of the $23 billion in World Bank aid last year. World Bank President Robert Zoellick reiterated today that he favors continuing such lending… Countries such as China and India still account for 70% of the world’s poor..” http://www.bloomberg.com/apps/news?pid=20601087&sid=auD5doJTjaAE&refer=home
“…China pursues its space project despite the fact it is still a developing country. Its per capita gross domestic product last year was just $2,010 compared with $44,970 in the US…” http://news.bbc.co.uk/2/hi/asia-pacific/7060347.stm
Brad,
I know that it is an uncertain concept, but it is the cyclically adjusted budget deficit that matters, and I suspect that that is no better in the US.
I recall Mrs Thatcher in the late 1980s looking forward to eliminating the UK national debt…..just before the housing bust set in and made it balloon!
REconomist — very fair point. the cyclically adjusted deficit isn’t all that great. gov borrowing is going up now.
“China’s money”, “the state capitalists’” money, “China Inc.’s” money or…?
“A Chinese court sentenced a former food and drug agency official to 15 years in prison on Tuesday for embezzling public funds… called a “typical case”…” http://www.reuters.com/article/latestCrisis/idUSPEK167510
“…”Often German companies realize too late that their investments in, let’s say China have been embezzled.”…” http://www.dw-world.de/dw/article/0,2144,2830229,00.html
I don’t think BoA is materially more expensive now:
http://finance.yahoo.com/q/bc?s=BAC&t=2y&l=on&z=m&q=l&c=
So they are free to buy if they want to. However BoA is considering getting out of investment banking altogether
Buffet realized long ago that investment banking is not a good business to own.
Brad,
Be intereste din your thoughts on the following dilemma. TAs we are seeing across the world with food price caps (FT today) and pernicious inflation in all “critical” asset classes, the fed has but two options deflation or inflation. Yet it is actually a hobsen’s choice no (?)because all the rate cutting in the world will not inflate wages (the essential component of the equation that greases the wheel) owing to the overseas enduring labor arbitrage, so the “critical” differential which governs US ability to live simply grows wider. The more the Fed nflates the worse the problem grows here and abroad. That leaves deflation and yet the Fed is deathly afraid of the skeletons that will float up from the bottom, especially when there are so many government initiatives that need funding? The white house econ braintrust was on CNBC today claining they wished the banks would just take the writedown and clear the decks, but which I guess is code to the Fed to cut hard and cut fast.
A commentator on a smart finaincal site breached the Wall Street Blue wall today and called into question the veracity of the supposed “free market” with Paulsen and the Fed all but screaming they are manipulating the markets. Another commentator mentioned that the biggest bubble of all is quite possibly - though not ignored if ou read this site - in US government bonds.
Seems like the Fed is totally helpless and will be steamrolled by history. Question is what is the asset class most likley to hold its value in a period of prolonged deflation? Thinking Japan?
“…In last year’s annual report, Mr Li revealed that in 2005 only $56 billion of $127 billion allocated to local government projects reached its destinations. He compared the process to a canal that winds its way through China’s timeless landscape, most of the water seeping away en route to its destination…” http://www.theaustralian.news.com.au/story/0,20867,21980868-2703,00.html
“Question is what is the asset class most likely to hold its value in a period of prolonged deflation? ”
- the dollar ?
.
.
there is no choice - in a finite world with an expanding population, under globalisation (dismantling of financial borders) - wages, the cost of labour, will fall relative to the cost of finite resources - oil, gas, other fossil fuels, metals, water, topsoil, timber . . . .
this breaks henry ford’s principle - because the auto workers can no longer afford the model T.
.
inflation spikes - but deflation wins. in a steadily contracting global economy most of our assumptions are reversed.
the dollar strengthens.
Actually, the Bear-CITIC deal is structured as a swap, so there is no net flow. PrefBlog argues that Bear provided CITIC with vendor financing it needed to buy a stake in Bear, but it could equally be said that CITIC provided Bear the vendor financing needed to buy a stake in CITIC. CITIC and China have lots of spare cash; Bear and the US not so much.
Thanks for the mention! I think of it as “vendor financing” because of the report that:Bear Stearns can convert Citic’s trust securities into equity in the five years after the transaction closes. After 40 years, they’ll automatically convert to Bear Stearns stock.
The Citic debt that Bear Stearns is acquiring will mature in six years. The U.S. firm can recoup its cash at that point if it decides not to convert the debt into shares.
So the deal will make Bear’s balance sheet ratios look better, although not providing any immediate liquidity.
The net flow of funds may occur in six years. As far as the official statistics - or even unofficial statistics - you look at are concerned, will such a flow come out of nowhere, or will the potential for such a flow be recorded immediately?