There may be some truth in that, Actually, that phenomenon seems asia-wide in the sense that the big banks treat much of their asia offices as backwater retreats where they send “questionable” personnel on a retiree trajectory. Good luck!

This makes it very different from the Soviet Union or even Japan in the 1980’s.

This also points out the real reason I think CIC made an investment in Blackstone and Morgan Stanley. One theme that one finds in conference discussions about CIC is that it is clear that the Chinese leadership believes that it just doesn’t have the necessary experience to manage a large equity fund, and the accquisitions in MS and Blackstone see to be ways of getting that experience. Commentators who talk about running CIC as an index fund miss that you just can’t passively invest $200 billion as a passive index fund. Just too big.

CIC probably bought into MS and Blackstone before it got its staff in place, because MS and Blackstone are going to make up a large fraction of said staff.

The big danger to “American capitalism” isn’t that the Chinese government will issue orders to Morgan Stanley. It’s more likely that the Chinese government will take instructions from Morgan Stanley rather than give them. The big danger is that Morgan Stanley will fail in some extremely high profile manner. There’s already been a small public backlash over Blackstone, and I can imagine a huge and ugly backlash if MS gives investment advice to CIC that turns out to be faulty.

I don’t think that was the main reason that this transfer occurred. The main reason that the transfer occurred was to make sure that the books balanced. Huijin is a listed corporation and to move that corporation from the MOF to CIC required a payment to MOF.

bsetser: and i see no evidence that the CIC is at all “insulated” from political pressure — and a fair amount of indirect evidence that the politburo has taken an interest in the CIC’s external investments

Certainly the Politburo is interested in CIC, but the Politburo simply does not have the time and staff to issue detailed instructions to CIC. There are about a thousand things that the Politburo has to worry about, and to approve every single investment that CIC makes would create an absurd amount of micromanagement. This is why central planning tends to not work.

bsetser: I am sure the blackstone deal was discussed at very senior levels, and the morgan stanley carries with it signs of top-level support.

The board of CIC is sufficiently senior to make these sorts of decisions. I’m sure that the Politburo isn’t opposed to these deals, and tacit approval and rubber stamp was necessary, but just from management theory, I find it implausible that the Politburo could micromanage CIC. If the Politburo has an hour meeting to talk about CIC, that means that they don’t have that hour to talk about Taiwan, inflation, Darfur, rural unrest, the UN, etc. etc.

bsetser: Certainly it seems a bit strange to me that the only major external investments the CIC has made are these two big stakes;

CIC made an investment in the China Railway IPO, but that didn’t get news. Also, it’s not that strange. Both MS and Blackstone were time-sensitive opportunities. If CIC waited three months for either, then they would have lost the chance.

and i see no evidence that the CIC is at all “insulated” from political pressure — and a fair amount of indirect evidence that the politburo has taken an interest in the CIC’s external investments. I am sure the blackstone deal was discussed at very senior levels, and the morgan stanley carries with it signs of top-level support. Certainly it seems a bit strange to me that the only major external investments the CIC has made are these two big stakes; as far as I know the rest of its funds are still being managed by SAFE while the CIC selects outside managers/ builds up in house capacity. It seems a bit strange to me that very controversial and potentially risky deals have been made before the CIC felt ready to pick outside managers …

but here i am reading the tea leaves of a culture i don’t fully understand (w/o knowing the language), which creates more than a usual margin of error.

but based on what i have been able to gather, the CIC isn’t operating in a structure that is divorced from politics …

I somewhat disagree with 2, and strongly disagree with 3. So far, we’ve seen CIC take minority stakes with small fractions of their cash. Also, CIC is as insulated from top level decisions as much as is possible with the Chinese system. The Politburo simply does not have the time to make investment decisions, which means that if investment decisions are being made outside of CIC, someone else has to make them, and there isn’t any group within the Party secretariat or the State Council that can make those decisions.

bsetser: - the banks have been forced to buy sterilization bills at below market prices when necessary, and the bonds funding the CIC now on the PBoC’s balance sheet will have to be placed on the balance sheet of the banks in a non-market operation

The orders for the banks to buy sterilization bills come through the PBC not CIC, so even if CIC were to privatize the banks, the PBC would still have the legal authority to force the banks to buy sterilization bills.

Also the bonds used to fund CIC are state treasury bonds, and there is no reason that I can think of why the PBC would force the bonds back on the banks rather than just have the PBC hold on to them. The PBC probably still has the authority to force the banks to buy treasuries, but that authority hasn’t been used since 1998, in large part because banks found all sorts of clever ways to circumvent it.

I do think that once the initialize set of purchases are done that CIC will start selling minority interests in the banks that they have.

I am a bit suspicious of the argument that the banks lending is now driven entirely by commercial motivations — my sense is that there are still often close ties between the bank branch, the local government and local businesses (some of which no doubt are very commercially viable). how it all works in practice is a mystery to me ….

Why should US invest its reserve? It can just print as much reserve as it wants. It makes more sense to buy more printers in this case(or just click your keyboard to enter a larger number in the computer). You got another thing wrong about the CIC’s influence over Chinese state banks. According to my knowledge about the corporate governance in China, the CIC officials probably have virtually little power to demand the state banks to do something. One simple reason, the CIC officials’ ranks might even be lower than the bank officials.

You just cannot compare apple to orange

realistically, China cannot sell — the math doesn’t work. A $ 1 trillion capital outflow from a country that needs a $750b inflow to finance its current account deficit would guarantee total disaster. The only market able to potentially absorb that kind of inflow is europe, and even europe’s capacity has limits.

Going from net purchases of $400b a year to a net sale of $1 trillion is a $1.4 trillion swing — that’s huge. The more realistic risk is that cHina stops buying any new $ and just puts all its reserves into europe. but europe asked china to stop buying euros recently, and any move that puts downward pressure on the $ puts downward pressure on the rmb so long as china maintains its link to the $. and right now, I don’t think the PBOC wants an even weaker RMB …

I think that kind of angst is very real, and whispered orders might be to “take this money and invest it in something that won’t necessarily loose its value, in case real inflation hits the US economy. Pssst, try not to seem to be panicking, but do it NOW”