SWFs to IMF: mind your own business, not ours …
It doesn’t seem like the IMF’s code of conduct for sovereign wealth funds is going anywhere. The power brokers in today’s global financial system argue that they are already commercially-motivated, so there is no need for them to promise to make only commercially-driven investments. And big sovereign funds don’t see the need for much (more) transparency either.
The difficulties agreeing on a code likely reflect the enormous differences among different sovereign funds — differences that reflect the differences in the countries that gave rise to the funds. Steven Weisman of the New York Times:
A week ago, Lou Jiwei, head of China’s $200 billion fund, said at a talk at the World Bank that the I.M.F.’s effort had run into disagreement over the meaning of transparency and political motivation: “It seems there wasn’t any agreement on that, because nobody wants to accept the fact that anybody’s better than themselves,” Mr. Lou said.
Apart from having lots of cash, Norway, Singapore and Abu Dhabi have relatively little in common - and no tradition of working together. Getting agreement among the G-7 is hard; getting agreement among the SWF-3 (or SWF-7) is probably close to impossible.
One contrast between today’s subprime crisis and the Asian crisis: in 1997 and 1998, the US — which then acted as creditor in the global financial system — used its leverage to increase the transparency of key actors. The US, notably, pushed for central banks to disclose far more frequent and accurate information about their reserves. The idea was to keep centrals banks from secretly mortgaging their reserves in a vain effort to defend currencies pegs — as Thailand had done.
Those efforts had a real impact. My own work tracking global reserves hinges on the data many central banks now release (January, incidentally, is shaping up as a huge month for Asia). The increase in transparency didn’t come without the exercise of a bit of leverage: the US made reserve disclosure a de facto requirement for borrowing from the IMF. One result: Countries that managed to avoid turning to the IMF back in the 1990s are systematically less transparent than countries that had to turn to the IMF.
Today, of course, the US is the borrower not the lender. And the big creditors today aren’t using their leverage to push for more transparency — but rather to resist such efforts.
The argument that SWFs shouldn’t increase their transparency now because the US resisted efforts to require more disclosure from hedge funds back in the 1990s strikes me as a red herring. If McKinsey’s report on "the new power brokers" is right, the big SWFs themselves already have large investments in a range of hedge funds and private equity firms. So far, they haven’t used their financial leverage to push for more hedge fund transparency.
Similarly, they didn’t condition their capital injections into Wall Street banks on more transparent disclose of the banks’ off-balance sheet positions.
Wall Street — I suspect — increasingly thinks it stands to gain far more if from untransparent funds than transparent funds. I strongly suspect — though of course I do not know — that the large untransparent funds generate substantially more fee income than say Norway’s government fund. The government fund tries to maximize returns — given the constraints on its mandate — in part by minimizing costs.
Plus, with the exception of Korea’s investment corporation, the big capital injections into Wall Street Banks have come from untransparent funds. That probably isn’t an accident. Funds that work within a mandate set by a democratically elected government might might need parliamentary approval for such a shift in strategy; at a minimum, they would need to be able to defend their investment in potentially risky institutions on terms that didn’t give them any formal control.
I also increasingly find the debate on "political" v "commercial" investments a bit frustrating as well. It assumes a clean dividing line between "commercial investment" and "political investment" that I am not sure really exists.
All sovereign funds are motivated by returns: none has a mandate to lose money. As a result, most funds are unlikely to make investments that result in large losses (at least intentionally) to produce political gains. Just think of the heat that the CIC has taken on its investment in Blackstone.
At the same time, most sovereign funds seem quite keen to do "deals" that offer the prospect of both strong financial returns and spillovers that benefit their home country. Consider:
– Dubai and Qatar were interested in NASDAQ and OMX because they believed that a stake in these companies would further their own ambitions to emerge as the Gulf’s regional financial center.
– Mubadala’s investment in Ferrari likely played a big role in Ferrari’s decision to build a theme park in Abu Dhabi. Abu Dhabi, Inc more or less said as much. The chairman of ALDAR, Ferrari’s theme park partner noted:
Mubadala Development company’s purchase of Ferrari shares earlier this year allowed ALDAR an opportunity to forge a relationship with one of the world’s leading brands. We are delighted that this opportunity has swiftly progressed into an exclusive agreement, which has arisen from the natural synergy of ideologies and objectives between Ferrari and ALDAR.
From Ferrari’s point of view, the backing of Abu Dhabi’s government likely made the theme park a much more attractive investment.
– The game also works both ways. Qatar airlines ordered a lot of A350s in mid-2007, helping Airbus — and thus France and Germany — out. That deal was signed in the presence of French President Sarkozy and Sheikh Hamad bin Khalifa Al-Thani. The QIA, along with DIC, takes a stake in EADS, Airbus’ parent company.
– At least some Gulf funds seem to think that they have done the US as a favor — not just made a good commercial investment — by taking big stakes in troubled US banks. Qatar’s Sheik Hamad Al-Thani: "But after the crisis I think most of the sovereign wealth funds, which have helped in the United States and elsewhere in Europe, this has been welcomed by the government."
And then there is the vexing set of issues surrounding the CIC.
The overarching motivation for the founding of the CIC wasn’t to make money. Borrowing in RMB and buying dollars, Australian dollars, pounds and euros is a fairly sure-fire way to lose money, at least in the short-run. The CIC’s primary purpose is to provide an alternative sterilization mechanism. Parts of China’s bureaucracy also liked the idea that the CIC would loosen the PBoC’s monopoly on the management of China’s foreign portfolio.
At the same time, no one should doubt that China is looking for better returns than it could get from Treasuries and Agencies. If the CIC doesn’t produce better foreign currency returns than SAFE, it is in trouble.
One of Lou Jiwei’s comments in the Weisman article jumped out at me:
Mr. Lou … said concerns about political motivations were unfounded because China’s fund invested mostly in portfolios, or took small positions in companies and did not try to control their policies.
Lou’s argument that the CIC took "small positions" seems at odds with the CIC’s current portfolio, which — best that I can tell — is dominated by large stakes. The CIC has large stakes in four state banks (ICBC, CCB, BoC and CDB), a small stake in China Railways and stakes in Blackstone and Morgan Stanley. It supposedly will be investing with JD Flowers. Its portfolio investments seems dominated by large stakes in the financial sector — see this article.
To me, the big surprise from the CIC has been its — to date — its lack of a conventional diversified portfolio of small stakes in a broad range of companies.
The fact that the CIC holds China’s stake in its state banks indicates it has a mandate that goes beyond simply looking for the best risk-adjusted return. At the same time, it is hard to draw a clean line between the CIC’s non-commercial activities and its commercial activities. The CIC probably has done far better on its China Railways stake (An investment supposedly done for "short-term earnings") than on its Blackstone stake.
An era of state-capitalism and state-led globalization will inevitably blur a lot of limes. A sovereign fund could well end up doing better on its investments in its own state-banks than on the rest of its portfolio. Does that make such investments commercial?
“The idea was to keep centrals banks from secretly mortgaging their reserves in a vain effort to defend currencies pegs — as Thailand had done.”
Can you translate, please?
Thailand has about $30b in listed reserves, but it has promised to sell those $ for baht in the forward market and effectively had no money left. the forward position was not disclosed. It did so to try to offset market pressure for the baht to fall.
korea had a lot of its reserves in Korean banks overseas branches — and it couldn’t really use those reserves since the banks had no alternative source of fx financing at the time. so it too had fewer reserves than seemed to be the case.
Brad,
Check out our World Net Daily Commentary about Sovereign Wealth Funds, “The tax break China gets but you don’t.” I think that we are the first to break the story that SWF investments in the US pay no U.S. taxes. By the way, we quote you on page 77 of our book, “Trading Away Our Future,” that is due out on March 1. Here’s the link to our commentary: http://www.worldnetdaily.com/index.php?fa=PAGE.view&pageId=55899
Howard Richman
http://www.idealtaxes.com
Govt meddling into free market will only worsen the capitalism and the welfare capitalism brings to people. What started in preserving currency stability has taken demonic form. While globalization is good,
it must be defined properly.Globalization without free movement of labour is nonsense.
Free labour movement around the world will settle most arbitrage oppurtunities in wages
and will end history of deficit provided all central banks maintain their inflation goals.
Brad,
It is just frustrated that you always try to make something out of CIC’s stakes in the 4 big Chinese banks. It means nothing. If China government wants to influence the big 4 banks, it can always do it with or without CIC. It does not matter who normally have those stakes in their pockets. CIC itself is just a vehicle, to minimize the fx loss.
It is open secret that the IMF is a defacto branch of the US Treasury Department so it’s really no surprise that the Sovereign Wealth Funds of the world are ignoring the dictates of the IMF based in Washington DC. LOL.
Brad, I can see that the CIC diversifies and spreads the impact of China’s foreign currency investment, but not really how it provides an alternative sterilisation mechanism, unless it issues renminbi debt that is quite different to PBoC sterilisation bills. Could you give some more detail please?
The duration of the MinFin bonds issued to fund the CIC is significantly longer than the duration of the bills issued by the PBoC. Think of the difference between a three month bill and a ten or fifteen year bond. If the Minfin were selling these bonds to the public rather than to the PBoC (via ABC) it would be provide a way of increasing the gov’s foreign assets without the issuance of more PboC bills/ increasing the reserve requirement.
Jin — right now the formal relationship between the banks and the CIC is like the relationship between Quwait’s property management arm and the QIA. The large ownership stakes in the domestic banks seems to me to be a major difference between the CIC and all other SWFs, with the exception of Temasek. I agree that the government has other levers of control, but the fact that the CIC wasn’t given a pure external portfolio management mandate strikes me as a significant.
In general, I view the shift to the CIC as effectively politicizing the management of china’s foreign assets far more than was the case with SAFE — and opening up the management of those assets to a wider range of domestic influences than was the case with SAFE. Obviously that is a controversial interpretation, but I haven’t seen much out of the CIC so far that has changed by view.
I think it will be interesting to see if the CIC participates in big takeover bids along side big SOEs — that is the one thing the CIC has yet to do, but there are plenty of rumors (especially re: Australian mining companies). If it goes down that path, it will clearly be a very different kind of institution that say Norway’s government fund, or even ADIA.
I don’t understand why a country like China has to invest surplus funds into the developed world. Couldn’t the money be used as capital reserves for a Chinese type GSE like Freddie Mac where it backs mortgages for the working class populace? Can’t the money be spend on rural educational programs-which wouldn’t be inflationary?
If these SWFs were from countries with democracies then their people would insist on transparency. Since there is no internal pressure for transparency, then the more democratic countries must insist on the rules.
Hasn’t the subprime lesson taught the perennial lesson of capitalism that accountability is needed for effective allocation of economic resources? Otherwise greed and stupidity are the ruling factors.
It’s easy to see why these big SWFs are reluctant to agree to a defined code of conduct. The boot on the other foot type of glee, and all that.
To imagine that SWFs will not exert political power through their investment is futile.
In the first place, in to lure a SWF to buy a sizable stake in a troubled financial company, there will have been all kinds of sweet nothings whispered, some of which may well be politically relevant.
And as a big shareholder, you always wield power in a company, and you don’t need to get involved in the board room to do so. As long as you are in a position to sell a big chunk of shares at perhaps an inopportune moment which would have negative impact on share prices, the board of directors will be walking on egg shells most of the time.
Then, when a SWF eventually decides to sell, the question becomes to whom? Will that be in context with some kind of future boardroom takeover?
So, what kind of transparency is needed, and how will it “help”? Apart from making it easier for elite economists to keep track of money flows and balances?
I can’t see how we could neutralize their power position much, transparent or not.
China is investing more in the developed world, tho not primarily through its SWF (yet). However, a lot of ASian economies would i think prefer NOT to receive CIC related inflows. remember, most emerging economies are now attracting more private funds than they want, so any new inflow would just increase the pace at which they need to intervene in the fx market to keep their currencies from rising.
Pallj — allowing not-yet elite economists to track their size is a worthy goal in and of itself. I increasingly worry that more and more countries are hiding the extent of their intervention in the fx market. SWFs are one way of doing so.
The other main purposes of transparency:
a) if you spell out your objectives and some contours of your portfolio, it is possible to assess whether or not you are acting in a manner consistent with your stated objectives, and to build a track record. when the CIC says it is a portfolio investor despite having a set of concentrated financial sector bets, that raises concerns. We for example know that that Norway plans to increase its equity share and can track how far it is toward achieving its goal — reducing the risk of a surprise.
b) I think it is harder for more transparent funds to make big shifts in their portfolios. but there may be a bit of a false correlation here: funds that are accountable to a parliament or government and thus need democratic approval for major strategy changes also tend to be transparent. but the reason why they aren’t moving their portfolio around quickly is not b/c they are transparent but rather b/c they have agents who need formal approval for big strategy changes.
c)the norwegian argument that if you are going to use your leverage (by for example investing according to your ethical principles) you should disclose how you are using your leverage makes sense to me.
d) it is a lot harder to use a fund that discloses its size/ returns and the like as a slush fund …
if you don’t know the size of a fund or its returns, it is hard to argue that a portion of the fund revenue has been used to say buy the ruler a really nice private jet.
guest — i think you hit the nail on the head. if non-democratic state funds were only investing in their own economies, the rest of the world wouldn’t have a vote. but when funds from non-democratic countries start having a big impact (or potentially big impact) on other markets, then a different set of questions comes up. big investors in any country need to be accepted by their host government.
that is as true for money from private investors in a democracy flowing into a country with a different political system as it is in the reverse case.
the problem is that it has long been convenient for the US and others to ignore the lack of transparency (including about their budgets and the allocation of the oil and financial revenue stream) from the big funds of certain key but less than democratic allies. So there is an element of changing long-established (if informal) norms. then again, part of that norm was that the big funds avoided big disclosed stakes and stayed out of the headlines … so there has been a change on both sides.
Written by Guest on 2008-02-10 16:50:13
Apparently USD cannot be used in China. Also when you put money in system, no matter what program, it will increase the inflation pressure.
The code of conduct and transparency is to protect small investors. For big institutional investors, it is assumed that they are sophiscated and can protect themselves. This is the arguements used by the hedge funds and private equities. SEC and other regulators already have enough tools to regulate market behavior. For example, if U.S. authorities want to know about and block any CIC’s deal, they always have the knowledge about the deal and can block it at will. Why is there a need for extra transparency? No big investors want to disclose their strategies since it will increase its cost. When there was no SWF, U.S. already blocked the oil company deal. I do not see why you need more to do something you already achieved.
Yesterday, Warren Buffett was quoted as stating the “US Dollar will be worthless in a decade” at a Toronto news conference. The death of the US Petro-Dollar will occur when Oil is no longer priced only in US Dollars. Even SWFs see the handwriting on the wall.
OPEC may switch to euro pricing within 10 yrs - secretary general
http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=0fa10387-aefd-4a51-9a37-4f11de1f1da6
LONDON Thomson Financial - OPEC could switch the pricing of oil from dollars into euros within a decade, secretary general Abdullah al-Badri told a weekly magazine.
The Organization of the Petroleum Exporting Countries could adopt the euro to combat the decline of the dollar, Badri told the Middle East Economic Digest (MEED), published in London.
“Maybe we can price the oil in the euro. It can be done, but it will take time,” he said.
Badri told MEED the change could happen within a decade, the magazine said.
MEED recalled that OPEC is under pressure from its members, who have seen their earnings decline sharply since 2000 due to its use of the dollar, which has fallen 44 pct in value against the euro in that time.
In response to Dave Chiang 19:14:46
Your following quote is not accurate:
Yesterday, Warren Buffett was quoted as stating the “US Dollar will be worthless in a decade” at a Toronto news conference.
What he did say is as reported below.
On the U.S. dollar, he suggested there was no reason it wouldn’t continue to fall over “the next five to 10 years” unless the U.S. government changed policies that have led to a massive trade deficit.
“Force-feeding a couple of billion a day to the rest of the world is inconsistent with a stable dollar.” It’s only natural, he said, that sovereign wealth funds from the Middle East and Asia that have funded that deficit would spend some of their U.S. currency reserves on large equity stakes in U.S. banks like Citigroup.
“The truth is we’re selling America to the rest of the world. It’s just a question of what form we sell it to them. They’re going to invest their money if we send them $2-billion a day. I don’t blame them at all for investing the money that we’re forcing them to invest.”
http://www.globeinvestor.com/servlet/story/RTGAM.20080206.wrbuffett0206/GIStory/
Yeah isn’t it SHOCKING for the IMF (ie US government) to be told to mind its own business. It doesn’t rule the roost anymore in world finance. If it vanished tomorrow most of the world would scarcely know the difference. How can the world survive without the US running everything? Very well, I would think.
instead of fussing about the SWFs… Why are not the Fed and ECB pushing their currencies down ? I mean all they have to do is start a reserve accumulation war : buy RMB yen, rouble and store them in their own sovereign wealth funds …
I mean just print the damn euros, dollars, sell them against the other currencies, build a SWF and buy companies in China japan and saudi arabia with the money you have in your sovereign wealth fund.
If that s what it takes to end the dumping from those states, just do it.
My bet is so far Europe and the USA are enjoying buying products on cheap credit that will not be repaid, just like asians and oil exporters are enjoying selling products on cheap credit that will not be repaid.
If the americans and or europeans want to end that, it s easy to do. They only have to copy their friends.
I mean basically if the money from the SWF where invested at home, there would simply be less money in those SWF since most of the money in those SWF result from undervalued currencies.
so the problem is not how should those funds be invested regulated etc. The problem is how come we ve allowed present imbalances to happen and to keep widening.
We know the price we all will pay if the rebalancing instead of being slowly managed happens in a sudden crisis. All sides will lose. Lots.
re: “most funds are unlikely to make investments that result in large losses (at least intentionally) to produce political gains.[??]” - perhaps if perceived or alleged political gains cannnot be appropriately communicated to constituents - i.e. the packaging of the swf ‘bailouts’ - whether or not private gains are a significant factor
re: “commercial vs. political” - some being (neo) utilities of sorts? http://en.wikipedia.org/wiki/Utilities
re: “argument that the CIC took “small positions” - perhaps through its stakes in banks, given that banks tend to be among the largest shareholders of many firms
aren’t the SWFs busily hiring ‘Western’ expertise to mind their businesses?
Brad, after this latest news, you better drink a few rounds of beers from Chinese state-owned Tsingtao Beer. New York University accepts a $50 million donation from the United Arab Emirates government. Soon the Economist Professors at NYU will be changing their tune to, “We love state-owned sovereign wealth funds for contributing to the efficiency of the marketplace”. Didn’t Princeton Professor Ben Bernanke get his appointment from the Bush Administration for writing, “Deficits don’t matter, we can stimulate the US Economy with the technological innovation called the electronic printing press. To fight deflation, we can drop money from helicopters”.
New York University accepts a $50 million donation from the United Arab Emirates
http://www.nytimes.com/2008/02/10/education/10global.html?em&ex=1202878800&en=74783ecf65600179&ei=5087%0A
Howard Richman — thanks for the link; I am looking forward to the book. You are right that a policy that looks reciprical in intent can end up being somewhat different in effect. I want to look into the questions you raise more, but the tax treatment of SWF dividends is an interesting angle.
guest — careful; if the US vanished tomorrow, there would be a gaping hole in global demand. there is a reason why the world’s central banks are propping up the dollar, at considerable risk to their own balance sheet. Plus, if the US disappeared, all the claims on the US held by the world’s central banks would also be worthless, creating a real hole. Debtors matter too –
The uS in a strange way would matter less in a more balanced world.
Elite, like the best (even if those in power aren’t paying deserved attention).
Why is the tax angle that interesting ? What benefits and US government services would SWF’s get, as US citizen’s get, in return for paying US taxes on dividend/income ?
Non-US citizens don’t get this treatment. QDII money will get taxed on US dividends.
Off-Topic:
How’s that for transparency, Chinese state-owned banks have disclosed subprime US mortgage holdings with Bank of China admitting to around $10 billion loss and ICBC admitting to $1.2 billion loss, but private Japan’s banks have not disclosed their holdings of $300 billion in subprime losses. The China PBoC only buys US Treasuries and GSE mortgage bonds with the US government guarantee. - DC
Japan Banks likely hold $300 Billion in Defaulting US Subprime loans
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/10/ccjapan110.xml
Americans and Europeans have so far confessed to $130bn of the estimated $400bn to $500bn of wealth that has vanished into the sub-prime hole. Somebody, somewhere, must be sitting on a vast nexus of undisclosed losses. We may find out soon enough whether the hold-outs are in Japan. The banks have to come clean under the country’s strict new audit codes by the end of the tax year in March.
Europe doesn’t need more STAGFLATION than it already has
Neither does the U.S. or the rest of the world.
Tell that to those in government who care or want to do something about it.
“The US… would matter less in a more balanced world.” - exactly
Brad, your point about SWF’s as the world’s new creditors using their leverage to reject calls for increased transparency is a good point.
In my view this “action” sends another signal of how truly “apolitical” the SWF’s are. The people crying about SWF’s buying equity in US companies are a joke, because they see some inherently qualitative “evil” difference in the organizational structure and internal controls of a public or private entity that has money to invest. Please!! The fact that a public or private entity still uses the US dollar and seeks to invest those US dollars into an entity incorporated in the US along side other American shareholders does not signal the end of the world or America. In fact, such actions help perpetuate the status quo.
If the SWF’s truly wanted to use their leverage for non commercial means, rejecting calls for increased transparency and declining to assume seats on a board of directors are nothing. Not only could they keep & invest more those funds at home or in neighboring developing nations (something which might actually be better for all of us in the world today), they could start using such leverage to address some of the “structural” advantages that governments and companies in the developed world have & use when it comes to competing in the global economy as a means of creating a true “level playing field”. If SWF’s started using their leverage to force the US & EU to agree to be more transparent with economic data & information they have on their multinationals operating in developing countries around the world, (but won’t share) as part of an effort to create global competition rules, that might be something “non commercial” in nature. Or if the SWF’s started using their leverage as a bargening chip in other global “negotiations” involving unequally matched developed and developing nations on issues involving agricultural subsidies, technology standards, IPR rules, or heaven forbit what currency oil is trade in, then I could see the crying about SWF’s using their leverage for “political” gains as something worth talking about. But until SWF’s wake up and start really taking advantage of their opportunities, the west should “thank” them for seeking so little in return for picking up an even greater share of the burden of keeping the music going in this global game.
There have been a lot of articles on the decline of the US in a last month. Paul Samuelson, Fareed Zacharia, the Indian guy in the NY times magazine from one of the Institutes are the ones that come to mind. As brilliant and well respected as these gentlemen are they dont understand the global financial system at all. Its hard for the US to decline when the rest of the world is willingly financing US prosperity for more electronic claims. Does this smack of a nation that is in horrible shape? No, the rest of the world has no idea how to get off the current system and with each passing month becomes more dependent on the US for global demand
guest — careful; if the US vanished tomorrow, there would be a gaping hole in global demand. there is a reason why the world’s central banks are propping up the dollar, at considerable risk to their own balance sheet. Plus, if the US disappeared, all the claims on the US held by the world’s central banks would also be worthless, creating a real hole. Debtors matter too –
I think you misread my post for some reason. I referred to the disappearance of the IMF, not the US consuming glutton. The IMF is just loose change compared to the funds being saved by China, the Gulf nations, etc., etc.
Its hard for the US to decline when the rest of the world is willingly financing US prosperity for more electronic claims.
*************************************
Well the US would decline pretty fast if they stopped financing us. Some day they will.
“Debtors matter too –”
especially when the ‘debtor’ maintains controlling interests, if not virtual monopolies on critical segments of information production, processing and distribution and, in general, the global infrastructure of entities that monetize and determine global asset valuations.
re: “you misread my post for some reason”
perhaps because you said: “How can the world survive without the US running everything? Very well, I would think.”
so how do you think ‘they’ would do this
“especially when the ‘debtor’ maintains controlling interests, if not virtual monopolies on critical segments of information production, processing and distribution and, in general, the global infrastructure of entities that monetize and determine global asset valuations.”
Exactly
Written by Guest on 2008-02-11 12:16:41
US Global Financial Hegemony Agenda
http://www.financialsense.com/editorials/engdahl/2008/0208.html
At the very heart of the new financial architecture that was facilitated by the Greenspan Fed and successive US Administrations over the past two decades and more, was a semi-monopoly held by three de facto unregulated private companies who operated to provide credit ratings for all securitized assets, of course for very nice fees.
Three rating agencies dominated the global business of credit ratings, the largest in the world being Moody’s Investors Service. In the boom years of securitization, Moody’s regularly reported well over a 50% profit on gross rating revenues. The other two in the global rating cartel were Standard & Poor’s and Fitch Ratings. All three were American companies intimately tied into the financial sinews of Wall Street and US finance. The fact that the world’s rating business was a de facto US monopoly was no accident. It was planned that way, as a main pillar of the world financial domination by New York. The control of the credit rating world was for the US global power projection almost tantamount to US domination in nuclear weapons as a power factor.
“perhaps because you said: “How can the world survive without the US running everything? Very well, I would think.”
so how do you think ‘they’ would do this”
The US business media really entirely overstates China’s dependence on the US Economy. Import-Export trade between China and the US amounts to only around 2-3% of China’s GDP. The Southeast Asian economies are increasingly China-centric based on shared cultured and geography. Inter-regional Asian trade exceeds trans-Pacific trade today. If one travels into the deep interior heartland of China, there is very little foreign participation in the mostly regional economy. While Private enterprise now constitutes 60% of China’s GDP, strategic core industries of the economy are retained by the Chinese state (ie. energy, telecom, transport, media etc). Exxon and AT&T are no where to be found in China. The rest of the world is already running very well without the US running everything.
Monolines…
Have you touched upon that topic, Brad?
A very chilling picture seems to be emerging, regarding these. Seems like some of the safety net is just painted on the floor,
http://www.ft.com/cms/s/0/e3f7990e-d555-11dc-8b56-0000779fd2ac.html
Michael Pettis has it right on his blog. China’s fx reserves are a result of a horribly misallocated economy.
“Michael Pettis has it right on his blog. China’s fx reserves are a result of a horribly misallocated economy. ”
Growth in China’s GDP clocked 11% annualized growth in the last quarter. US Economists can only dream in their sleep for those numbers. The US Trade Deficit with the entire world is a result of a horribly misallocated economy.
And looking at your Ferrari example, if opacity, accounting, tax and other issues which prevent the recognition or ‘accurate’ valuation of significant U.S. assets:
“…Mars… is a privately held and highly secretive organization… With most insurance companies, we are not able to distill an accurate valuation…” etc. http://www.interbrand.com/best_brands_2004_faq.asp
“As a percentage, the proportion of intangible assets is increasing, driving the need for tools that can evaluate and compare them…” http://domino.watson.ibm.com/odis/odis.nsf/pages/board.05.html
China better grow at 11 percent forever otherwise they are going to look really stupid shipping all of the countries savings to the US so we can buy Nikes.
sorry - “which” should have been edited from 2008-02-11 13:27:26 - point being that for all the angst about inaccuracies and deficiencies in accounting for liabilites, scant attention paid to the same on the asset side
isn’t china still a world bank dependent, developing country?
“China better grow at 11 percent forever otherwise they are going to look really stupid shipping all of the countries savings to the US so we can buy Nikes.”
They are not anymore shipping all of their savings in to US Treasury bonds. Last thursday, how well did the 30 Treasury bond sell to foreign central banks? No one is willing to accept a lousy 4.4% yield for 30 years with even the “official bogus” US inflation rate at 4.1%. The “real core” inflation rate that includes food and energy is much higher. That is exactly the reason for SWFs to invest in other tangible assets to earn anything better than a guaranteed loss of capital. US Dollar Bondholders will soon revolt over Bernanke’s “cheap money” policy that exclusively benefits the narrow economic interests of leveraged Wall Street Hedge Funds.
I completely agree with you. Then why dont they stop doing it?
Dave Chiang: No one is willing to accept a lousy 4.4% yield for 30 years with even the “official bogus” US inflation rate at 4.1%.
This is obviously false: China is wantonly buying lots of those. And their SWFs investments have good chances to fare even worse. Truth is you can’t make something worthless be worse something by buying tons of it. Not in the long run. Sooner or later, China will take a big loss and you know it. Giving away large sums of money is not something people normally brag about.
“This is obviously false: China is wantonly buying lots of those.”
Truth is that Japan has been the largest buyer of US Bonds if you included both private and public purchases. Japanese Banks look to be further impaired with an outright loss of $300 billion on US subprime mortgage defaults. For being the strategic ally of the US, the Japanese are rewarded the privilege of getting further shafted out of their hard earned wealth. They sold all of their Toyotas and Sonys in return for US subprime toilet paper. True the Chinese also have a overallocation of US Treasury Bonds, but at least they are being pro-active by establishing a SWF to diversity assets. Unlike US subprime CDO bonds, the US Treasury bonds held by the China PBoC won’t be a total loss even with dollar devaluation.
I really don’t see a point in a code of conduct. If the US wants to enforce any standards, it can do so unilaterally. I really don’t see the point in even **trying** to reach any sort of consensus or code of conduct. If the US wants to say no to SWF’s, then just say no. The multilateral non-sense just seems totally absurd.
Also as far as CIC goes, I really don’t see what the fuss over transparency is. We know exactly what CIC has been spending its funds on, and the CIC is far too high profile to allow it to do anything quietly. One reason that the Chinese government has centralized equity purchases in CIC, is that everyone looks at CIC, whereas if the purchases were spread across a hundred smaller funds, no one would see anything.
China isn’t a parliamentary democracy, but there are effective mechanisms for popular control when it comes to economic issues. CIC getting burned over Blackstone has obviously changed its strategy with respect to corporate takeovers. CIC simply cannot lose large amounts of money without bad political consequences.
bsetser: I strongly suspect — though of course I do not know — that the large untransparent funds generate substantially more fee income than say Norway’s government fund.
I don’t see how. Asset management is a commoditized business and you end up with the same fees where ever you go.
bsetser: Plus, with the exception of Korea’s investment corporation, the big capital injections into Wall Street Banks have come from untransparent funds.
Also the pension fund of New Jersey.
bsetser: To me, the big surprise from the CIC has been its — to date — its lack of a conventional diversified portfolio of small stakes in a broad range of companies.
CIC has been in business for a few months. The problem with a diversified portfolio is that they more stocks you have, the more money managers you need, and CIC is in the process of hiring money managers.
bsetser: The fact that the CIC holds China’s stake in its state banks indicates it has a mandate that goes beyond simply looking for the best risk-adjusted return.
Not really. First of all, there is a lot of growth potential in Chinese banks. Second, what may very will happen is that once CIC gets going, that it will do stock swaps and trade its holdings in PRC banks for other holdings.
I still think it is very odd that people complain about the non-transparency of CIC, when CIC has been *very* transparent compared to your typical fund.
Do you really know where DE Shaw or Rennaisannce Technologies, GM, Yale, or for that matter the Bill and Melinda Gates Foundation invests its money?
DC — given that China now has a larger current account surplus than Japan and unlike Japan has attracted large net private capital inflows that are still primarily being recycled into bonds, there is little doubt that Chinese purchases of bonds (on a flow basis) tops Japanese purchases. when the revised US data comes out i suspect combined Chinese holdings of treasuries and agencies will rival japanese holdings as well.
guest — apologies if i misread you. tis true that the imf is no longer a financial superpower.
monolines are a very important topic. they also are a topic that I haven’t done any real work on, so I don’t have any original thoughts on the topic.
bsetser: Apart from having lots of cash, Norway, Singapore and Abu Dhabi have relatively little in common - and no tradition of working together.
This is precisely why I think it would be a good thing to get them all on the boards of major banks. If you can get Norway, Singapore, Abu Dhuabi, China, and the state of New Jersey to agree that the CEO is incompetent and has got to go, then it is likely that the CEO is incompetent and has to go.
Pajj: As long as you are in a position to sell a big chunk of shares at perhaps an inopportune moment which would have negative impact on share prices, the board of directors will be walking on egg shells most of the time.
No they won’t. The board doesn’t care if you dump 5% of the shares. The CEO probably would if he is being compensated with options, but the board is likely to just tell you to go ahead.
And you’ll be cutting your own throat in the process. If you dump large numbers of shares to push down the price, you’ll lose money on the deal. The share price will go down for about a week, and then things will go back to normal.
US Recession not a threat to Chinese Economy, but China can’t bailout rest of global economy
http://www.chron.com/disp/story.mpl/business/5526574.html
The U.S. and European economic slowdown that may follow doesn’t appear to be a threat to the surging Chinese economy, however, said Linda Yueh, an economics professor at the University of Oxford in England. China’s economy will continue to grow even as exports fall.
Its growth will be bolstered by the size of its domestic economy, ongoing foreign investments and the boost expected from the 2008 Summer Olympics in Beijing.
China helped cushion the global economy when the U.S. economy last slowed after the crash of the dot-com boom in 2000, but the situation was different then, Yueh said.
“The rest of Asia was recovering alongside China from the currency and financial crises of the late 1990s,” Yueh said. “The region as a whole will still likely continue to grow robustly this year, but it can’t provide the same kind of impetus this time.”
And Chinese consumers cannot make up for belt-tightening among U.S. consumers.
“These consumers are not as rich, and they tend to save more than Americans,” Yueh said. “They don’t have enough purchasing power to make up for the fall.”
“imf is no longer a financial superpower”
was it ever intended to be?
might we ever see an swf for iraq?
“[Iraq's economy is]… doing remarkably well. Real estate is booming. Construction, retail and wholesale trade sectors are healthy… Estimates vary, but one from Global Insight puts GDP growth at 17% last year and projects 13% for 2006…” http://en.wikipedia.org/wiki/Economy_of_Iraq
“Harvard Management Company (HMC) has long been a clandestine organization. Though it manages Harvard’s $34.9 billion endowment and its annual returns are announced each year in a closely-watched press release, HMC’s portfolio, trades, and practices are generally shrouded in secrecy…” http://www.thecrimson.com/article.aspx?ref=520298
guest — uh, not in the near future. Iraq has better ways of spending its current oil windfall, if it could jsut agree among itself on what to buy.
the HMC point frankly doesn’t hold. HMC releases its size and returns every year, as well as some information about how much it pays its fund managers. ADIA doesn’t release its size or its annual returns, nor does singapore’s GIC. comparatively speaking HMC is a model of transparency.
2fish. Norway doesn’t invest in Hfunds or PE funds. It also doesn’t pay i-banking fees for big “Deals”. the gulf funds invest in HFs, PE funds and pay deal fees. ergo i stand by my earlier argument.
so far the CIC has been fairly transparent — i agree. more so than the state banks! the fact that the minfin finances it with bonds allows us to know its initial size. I am not sure how/ when it will report its subsequent returns.
but it clearly has a very concentrated portfolio — and will still have a concentrated portfolio after it puts $30b in various portfolio managers hands.
http://www.newyorker.com/talk/financial/2008/02/11/080211ta_talk_surowiecki?printable=true
Somehow, I can’t see SWFs stepping up to the plate for these insurers, but someone will have to. But I don’t know who will, or can.
When you consider that repossessed houses in the US were about 1% of mortgages, and while I haven’t seen any figures about what % is struggling but still keeping their houses, it’s clear that the vast majority is managing to meet their mortgage. In Britain less than 0.25 have lost their homes, while around 1% are/have been up to 3 months in arrears. Bad, but not catastrophic, and in theory the losses shouldn’t be worse than the realized loss in value of the repossessed properties.
On its own, I don’t see how this sub-prime crisis could cripple the financial system as badly as it seems to have. Its not like taking a dive into an empty swimming pool, is it? The system has got to be making some kind of profit of the rest of us, who are stubbornly still paying our mortgage!
But these insurance entities, monolines, seem to be on the verge of backfiring badly on their clientele. Credit rating of anyone who’s been using them is under threat, simply by association. Murky waters ahead.
iraq - questioning the point at which growth rates indicate risk
hmc - not a point, but along with 2fish, seeking clarification of your transparency issues
bsetser: 2fish. Norway doesn’t invest in Hfunds or PE funds. It also doesn’t pay i-banking fees for big “Deals”. the gulf funds invest in HFs, PE funds and pay deal fees. ergo i stand by my earlier argument.
Norway may not but Calpers, New Jersey, and pretty much every state pension fund in the US does.
Pajj: When you consider that repossessed houses in the US were about 1% of mortgages, and while I haven’t seen any figures about what % is struggling but still keeping their houses, it’s clear that the vast majority is managing to meet their mortgage.
This is the big difference between prime and subprime mortgages. Prime mortgages are loaned based on the credit of the borrower and the expectations of future income. Subprime are loaned based on the value of the house as collateral.
If real estate prices drop suddenly, this kills subprime loans, because once the house value drops, there is no real reason for the borrower to keep paying. When housing prices drop, prime borrowers keep paying since they have jobs and want to keep their good credit. As long as prime borrowers keep their jobs, they’ll keep paying.
What will cause major damage to the prime market is if people start losing their jobs in large numbers.
bsetser: so far the CIC has been fairly transparent — i agree. more so than the state banks!
I don’t see any particular lack of transparency in the state banks. Three of the four are listed on HK or NYSE and they have to be as transparent as any listed company in HK or NYSE because of exchange rules and security regulators and their books are all audited by international accounting firms. Yes, it is true that there could be weird things going on, but there is no particular reason to think that one should be more suspicious of Bank of China’s numbers than those of General Motors.
bsetser: the fact that the minfin finances it with bonds allows us to know its initial size. I am not sure how/ when it will report its subsequent returns.
It will probably post them on its website just like its predecessor the National Social Security Fund has done for years.
Also, I’m not sure what the purpose of this transparency push is exactly. The trouble with transparency is that you can end up with too much information.
2fish — right now, there is very little risk that the big gulf funds will release two much information!
I outlined why i think transparency matters above — it is hard to assess how SWFs are impacting the market without some baseline information, without some information on their growth it is quite possible for governments to hide their fx intervention and without a bit of information, it is hard to know if SWFs are investing in ways consistent with their mandates. And then there are general good governance concerns — when governments don’t reveal what they are doing, there is a lot more scope for doing things that they shouldn’t be doing.
finally, I think SWFs need a bit of buy-in from the countries they are investing in — and to so, they need to show that they are responsible investors, not hide. what a government does in its own country is mostly its own business, but SWFs act outside their borders. China is potentially a very large investor in the US. that in my view creates some responsibilities.
I also agree with argument above that a lot of these issues arise b/c many countries with SWFs are not democracies, and thus do not have the kind of internal accountability to a parliament (a major constraint) that other funds face. funds from non-democratic governments that want to invest in democracies, in my view, need to accept a level of scrutiny in their cross-border investments that they wouldn’t necessarily have to accept at home.
The US business media really entirely overstates China’s dependence on the US Economy. Import-Export trade between China and the US amounts to only around 2-3% of China’s GDP.
DC how can you keep posting such blatantly false numbers ?
1 exports are around 40% of chinese GDP, Imports a bit over 30%. numbers here http://en.wikipedia.org/wiki/Economy_of_the_People’s_Republic_of_China
2USA account for 21% of those 40% (see business partners in the page posted above), so that makes 8%. Not 2-3%.
And europe as a whole must account for another 15% (germany+UK = 6,7%. So europe is like 6% of GDP.
On top of this, china also exports to countries who later reexport to USA and europe (hong kong 15% of chinese exports … can t all stay in hong kong, japan, korea) …
So all in allm, direct exports to USA and EUrope, indirect exports to europe and USA, it s probably more than 20% of GDP.
ANd it s not over.
Gross fixed investment is 40.9 % of GDP. How much of that investment is related to USA and europe ? Say 30%. Investment is the first thing that will disappear.
So say in 2009 there s a 10% reduction in investment related to exports and a fall of 5% in exports to the USA. Then you have 5% of 20% of GDP and 10% of 30% of 40% of GDP going away.
1% + 1.2% that s 2.2 points of GDP going away in 2009.
But that s not all.
The problem is not the US crisis is spreading to the rest of the world through falling imports… That s old school economics …
THe problem we re facing is a GLOBAL debt bubble exploding. That debt bubble is HIGHLY present in china.
The Chinese stock market will crash, if not in 2008, then 2009. ANd so will chinese housing prices.
It s just that the USA and Europe will adjust to the crisis by devaluating their currencies relative to asia, cutting on imports and relocating productions.
Meanwhile China and asia will have claims on as you put it toilet paper, falling export markets and still the same number of people looking for jobs, shelter, and food.
China is just like the USA in 1929, the big engine fueling the global debt bubble and global debt fueled growth… the big engine about to run empty once that that debt bubble explodes, protectionism kicks in and industrial cities suddenly turn silent, while banks turn bankrupt one after another.
The Southeast Asian economies are increasingly China-centric based on shared cultured and geography. Inter-regional Asian trade exceeds trans-Pacific trade today. If one travels into the deep interior heartland of China, there is very little foreign participation in the mostly regional economy. While Private enterprise now constitutes 60% of China’s GDP, strategic core industries of the economy are retained by the Chinese state (ie. energy, telecom, transport, media etc). Exxon and AT&T are no where to be found in China. The rest of the world is already running very well without the US running everything.
Written by Dave Chiang on 2008-02-11 13:02:53
df,
Yes, in 1929 great depression, US banks turned bankrupt one after another. What did Franklin D. Roosevelt do? He put federal deposit insurance in place. In China, banks are already insured by government. So no need to worry about that.
2nd, you have no idea about Chinese stock market. it had been crashed and depressed before and had little to do with real economy. Why do you think that China will keep appreciate RMB if exports decline dramatically. When protectionism kicks in, if China cannot sell in US and EU anyway, why would it keep a strong currency to kill its advantage in other markets?
http://www.nytimes.com/2008/02/12/business/12credit.html?hp
“The delinquency and foreclosure rate for all mortgages, 7.3 percent, is higher than at any time since the group started tracking that data in 1979″
That is quite a lot higher than in the UK.
I can appreciate that there is a problem here! We might as well accept that there is going to be a bulk slowdown in US consumption before it picks up again, if this is the case. I imagine this will be felt by lower US imports (at least if you disregard oil), as well as by US manufacturers in a significant way.
You can’t say we live in uninteresting times, can you? If you can look at the bright side, sorta…
df: 1 exports are around 40% of chinese GDP, Imports a bit over 30%. numbers here
Exports are gross numbers. GDP are net numbers. If you put two $1.00 widgets to form a $2.10 sprocket and export, that contributes $2.10 to exports but $0.10 to GDP. If you then divide exports / GDP, you get a number that overestimates contribution to GDP.
df: Gross fixed investment is 40.9 % of GDP. How much of that investment is related to USA and europe?
Very little of it actually is. Most of it is internal demand.
df: Say 30%. Investment is the first thing that will disappear.
Say 3% or 300%. You can prove anything you want if you make up numbers. What makes you think that 75% of PRC investment is export related? (Research reports from Goldman-Sachs and Credit Suisse suggests to me that it isn’t.)
df: The Chinese stock market will crash, if not in 2008, then 2009. ANd so will chinese housing price.
Sure. Just like the Chinese stock market and housing market crashed in 2004 and 1998 and 1994. The Chinese stock market and housing market periodically crashes. This time, it’s crashing in a much more orderly way than in previous years.
df: China is just like the USA in 1929, the big engine fueling the global debt bubble and global debt fueled growth…
No it’s not. The big difference between China-2008 and the US-1929 and Japan-1989 is that banks can’t own stocks. This means that if the stock and property markets crash, it doesn’t automatically result in banks going out of business. The other difference is that everyone in China has been expecting the markets to crash, which means that people have been preparing for the markets crashing in an orderly way.
So, W Buffet is willing to adopt the municipal part of the monoline sector, but won’t touch the CDO part with a ten foot pole. Who can blame him? It would still be an act of SWF proportions.
But will any of the SWFs be interested to step in and re-capitalize this sector, before the proverbial s*** hits the fan?
According to Buffet, “we’ll just have to see how it plays out”
twofish.
You write “very little of if” but give no data supporting this.
I see exports are 40% of GDP, i ve said then one can assume at least 30% of investment is export related. If you have data on this please post it.
I don t see why banks owning stocks or not would make a difference. The thing is bank have lent to companies who will find they have no market for their products, hence they will go bankrupt. It does not matter much if banks own the stocks of those companies or if they only have loans to those companies. They lose money one way or the other.
If you look only at the net exports (export-import) contribution to GDP you can not differenciate a country with 1 % of GDP net exports with exports being 40% of its GDP (and imports around 39) and a country with 1% of GDP net exports with exports being 10% of GDP (imports around 9).
The question is not : How much do present net exports contribute to Chinese growth ?
But :
How sensible is China to a fall in exports ?
If you can put that in numbers better than me, please feel free. My point is, it s simply false to state that China needs the USA only for 2% of its GDP.
China can not control the price of its currency forever. Right now it is able too only because USA and EUrope find convenient to receive cheap financing from China. Once the debt bubble explodes, there will be less and less people in EUrope and in the USA willing to borrow, so it ll simply be harder for China to keep its currency down : there ll be very few people looking for chinese loans (simply because they ll be very few people looking for loans). So the chinese currency will rise till it reaches its market value.
If you call the recent chinese small falls crashes, then we do not agree on the definition of a crash. A crash is when PER fall to around 6-7 for quite some time so a division of prices by 3 to 4 in Europe and USA, probably more in China.
df: I don t see why banks owning stocks or not would make a difference.
Because the banks go under if the market crashes regardless of whether or not the company is still selling things.
df: The thing is bank have lent to companies who will find they have no market for their products, hence they will go bankrupt.
But there is a cushion of equity and cash reserve before the banks get hit. If the banks own stocks, then they are first in line to get hit rather than last in line. Once the banks get hit, then they have to burn through their equity and reserves before depositors get hit.
The fact that banks are last in line before they get hit is important because in that situation, “let the market drop” is viable.
df: If you can put that in numbers better than me, please feel free. My point is, it s simply false to state that China needs the USA only for 2% of its GDP.
China is a manufacturing center so you do need to balance imports and exports. If exports to the US go down, the imports which consist of raw materials for those exports will also go down.
df: If you call the recent chinese small falls crashes, then we do not agree on the definition of a crash.
Between 2004 and 2005, Shanghai went down about 40%.
Bsetser:non-transparency of non democratic SWFs
That may well change pretty soon. The Chinese government though seen as a single entity but rather fractitious what with competition/infighting amongst the various departments and regions, wasn’t that the reason why they set up 2 consecutive SWFs ? When investments turn from + to -, pretty sure that everyone ’s gonna start asking questions
as for those interested in the monoliners issue (apologies to brad for this off topic comment) try nakedcapitalism, yves seems to have pretty good coverage.