Chinese state investment abroad: familiar or something new?
Henny Sender has an excellent account of China’s decision not to allow the China Development Bank (CDB) to invest in Citibank in January in Monday’s Financial Times. It follows on Richard McGregor’s earlier analysis of China’s decision to allow Chinalco to take a big stake in Rio Tinto – a stake whose purchase Chinalco financed through a loan from the China Development Bank. Together they paint a reasonably comprehensive picture, I suspect, of the way China’s government decides what kind of external stakes Chinese state institutions should be allowed to buy.
Sender argues that the CDB’s failure to get a stake in Citi shows that the big sovereign funds aren’t rather like big private investment funds – they have to keep their big shareholders happy as they try to eke out the desired returns.
“But as the story of Citi and the Chinese reveals, SWFs have a lot in common with other big funds in the financial world – the same need to keep their investors happy and meet their returns criteria, giving their negotiations a flavour entirely familiar to the bankers and lawyers around the table.”
The way Wall Street reached out to these funds and how they responded suggests there is nothing sinister about this two-way courtship. It has instead been a process marked by competition, calculation and miscalculation on both sides. Indeed, its very messiness might provide some reassurance that the sovereign wealth funds hardly seem to have nefarious agendas.
However, Sender’s description of the decision making around the China Development Bank’s desire to invest in Citi left me with a strong sense that China’s state investment has a different flavor than investment by private firms: The overall investment process seems incredibly politicized, with the key decisions made by the top level of China’s government. Bureaucratic politics drove the outcome. Sender:
Ultimate authority in Beijing resides in the State Council, which acts as the arbiter among competing interests in China. No matter which organisation Citi approached, the fate of the Citi request for cash would come to be decided behind closed doors there.
CDB’s Mr Chen returned to Beijing from New York and began making telephone calls. He had two tasks: to convince the authorities in Beijing to approve his ambitious plans; and to do some rapid due diligence checks on Citi. ….
The “story” was particularly important at the turn of the year, as the Chinese authorities were becoming apprehensive about overseas investments. CIC’s maiden investment in May had been a $3bn stake in Blackstone on the eve of that group’s listing – an investment in common shares that was struck without any discount or influence, while barring the new fund from selling for four years or making similar investments for a year. By the time the Chinese were talking to Citi, the Blackstone investment had nearly halved in value.
Moreover, CIC was already investing in Morgan Stanley. CIC executives were concerned both that they already had enough exposure to US financial groups and that, if they took a stake in Citi as well, they would trigger a political backlash in the US, according to Jesse Wang, the number three at CIC.
CDB had meanwhile not fared well with the stake it took in Barclays of the UK. There was also a competitive dynamic at work – officials at Safe were arguing to the State Council that only their organisation had the experience to invest sensibly, many people with knowledge of the matter say. …..
On the weekend of January 12-13, as the deadline for the financing approached, the CDB team was tense. Still, when the news came that Wen Jiabao, China’s prime minister, and the State Council had decided to withhold approval in the absence of consensus among all the interested parties consulted in Beijing, CDB officials were stunned.
The fear of incurring losses on an investment in Citi – and a resulting loss of face – was a big part of the reason for that outcome. But the opposition of the banking regulators led by Mr Liu and concerns over competing investment arms were other factors, the advisers to CDB say.
The fact that the equivalent of China’s cabinet — though I suspect the inner core of the State Council is a more powerful group than a modern US cabinet — seems to be the key decision-making body is bound to shape the world’s perceptions of China’s outward investment. If many of the members of the United States’ National Security Council meetings also decided which foreign firms the US should buy, I would suspect that US investment abroad would be viewed with rather more suspicion. To date, China has not set up the institutions that manage its foreign investment in ways that insulate their decision-making from China’s top political leadership.
The extensive involvement of China’s top leaders reflects the fact that in many ways China are just starting to invest in foreign equities, so each big investment effectively sets a new precedent and therefore makes policy. It also may be a consequence of the decision to spread the management of China’s foreign exchange among different state institutions (SAFE, the CIC, the big state banks). That decision seems to have guaranteed that disputes over who gets to buy will go to the top level of China’s government to resolve.
MORE FOLLOWS
One interesting tidbit: China’s foreign ministry was apparently ready to shift its accounts to Citi if the CDB was able to invest in Citi.
Some arms of the government were impressed by the image of a Chinese entity helping what was seen as America’s mightiest bank now it was on its knees. The foreign ministry was highly supportive and offered to move its accounts to Citi. “They thought of it as legitimising China,” says one CDB adviser.
No wonder US and European firms think accepting investment from China will give them a leg up getting business (or getting approval to do business) from China’s state.
It is also striking – at least to me – that China would have been investing at least in part on the belief that Citi was too big to fail.
“But to many sovereign wealth fund executives, Citi is America – and they say they believe the authorities would never let Citi go down. So CIC’s Mr Gao and Mr Chen of CDB were greeted enthusiastically in December when each came calling.”
China seems to believe that it was buying the US government’s commitment to Citi, not just Citi’s equity. That worries me a little. Suppose China’s government had thought that the US was similarly committed to back Bear Stearns’ equity investors, not just the holders of its debt? When a large institution is taken over by the government to avoid outright insolvency, the equity owners should be expected to take a hit.
Moreover, investing in institutions that are too big to fail means investing in institutions that ultimately have to be regulated. Chine bought into Morgan Stanley just before — one hopes — the regulatory regime around broker leaders will change. Now that the broker-dealers have access to the Fed, limiting moral hazard likely requires that they accept limits on their leverage – limits that could impact on their future profits.
Gideon Rachman thinks that state investment will create ties that reduce political friction between the countries doing the investment and the US and Europe.
If governments in China, Russia and the Middle East have large investments in the US and the European Union, then they also have a direct stake in the continuing prosperity of America and the EU.
But it seems just as likely to me to create a new source of friction – whether because of a US decision that adversely impacts the value of China’s equity investment or because of a US decision to block a Chinese investment because of concerns about Chinese state ownership that China believes are unfounded. The US government will increasingly be making regulatory decisions that influence the value of the investments that seem to have been personally approved by the China’s top leadership.
Read Sender’s analysis of the CDB’s failed deal with Citi. Read McGregor’s account of Chinalco’s successful bid for a large stake in Rio Tinto. I was struck by how different China’s decision making process is from the decision-making process at other sovereign wealth funds (largely because of the number of competing institutions and bureaucracies that shape the final outcome), let alone the decision-making process at a private firm. To me, the decision-making process sounded a lot more like the decision-making process in the US about whether to support a large IMF program to a troubled emerging economy than the decision-making process in a big private firm deciding whether to invest in a troubled financial institution. But I may be bringing my own bias to bear.
It isn’t hard to see why all this matters.
The foreign assets of China’s government growing by something like $50 billion a month. China consequently has the financial capacity to do many such deals (think a Chinalco-Rio Tinto deal a week, or two-to-three CDB-Citi deals a week) if it decides it wants to – and if the US, Europe and Australia are willing to allow the deals to go through.
UPDATE: The Wall Street Journal weighs in on Russia’s new sovereign fund. Apparently, the investment of a Russian state bank with close ties to the Kremlin in EADS was not welcome — and that investment has shaped Europe’s view of Russia’s fund. Setting the ground rules for Chinese and Russian state investment in US, European and Australian equities isn’t going to be easy.
I can see your concerns, Brad. But on a related issue, since the speed of change in China is so fast, will things stay the same way as they are today? Say, in a decade’s time, or maybe even four or five years from now, how different are those financial institutions mentioned in your article, in terms of their organization structures and their concept of asset allocation practice? Maybe by that time Chinese state-owned conglomerates will be major players in FDI investment globally and asset management division of Chinese commercial banks will be on the top list with total asset under management. So how would you cope with that? My sense is CIC and CDB are just forebears of things that will come out of Chinese enormous foreign reserves and private savings, no government agency, power as Chinese State Council can totally control and engineer the whole process as your article implied to.
The strange thing is that I’m reading this and thinking about how similar the decision making process is between China and the US. In the US case any bank acquisitions have to get the approvals of the Department of Justice, the Fed, and Treasury. The only difference I can see is that China puts more scrutiny on outgoing investments, whereas in the US the scrutiny is more on incoming investments. If you have an incoming investment then it would have go through review of CFIUS (which is the US equivalent of the State Council).
Part of the reason that I think that Wen Jiabao blocked the deal is that if he had approved it, it would have gotten blocked by CFIUS. I just don’t see the CFIUS approving a large Chinese stake in Citigroup. One of the interesting things is how public and private interact since the main groups lobbying against CFIUS approval would have been banks with alternate bids.
Ultimately, I don’t think that bureaucratic politics *did* drive the outcome. Bureaucratic politics was the machinery by which the decisions were made, but if you look at the factors that caused that particular decision to be made, they were external factors, and if the external factors were different (i.e. if the Blackstone bid had been seen as successful or CNOOC hadn’t gotten such a large drubbing), the decision would have been different.
Also, one factor that enters in Wen Jiabao’s thinking is that he is more exposed to the political consequences of decision making than CDB is, which is his job.
What I would find interesting is a discussion of the internal politics of Citigroup that led to the decision being made to ask CIC for money, and I think that you’d find an interesting story of internal bureaucratic wrangling. Financial corporations are large bureaucracies that act very similar to state bureaucracies, except that they are far less transparent. We can get a good idea of how the Chinese government makes its decisions. Good luck on figuring out how Citigroup decides things.
Brad, I do not see any difference between CDB and other big private firms. For such a big investment, in any private firm, you got to discuss the legal risks, the regulation risks, potential return and financial risks. The manager need to compete with other managers for funding and opportunity. There is office politics. You need senior executives to back you to get your proposal passed.
bsetser: China seems to believe that it was buying the US government’s commitment to Citi, not just Citi’s equity.
Change that to some people in the Chinese government seem to believe….
Remember that in the end Wen decided not to go forward with the deal, and I’m sure that part of the reason was that he ran some of the arguments he was hearing to other people with different viewpoints, and they didn’t think much of the arguments. In particular, anyone with much experience with the United States should know that having CIC buy a large chunk of Citigroup would quickly turn into another high profile irritant in US-China relations, and I’m sure that the CSRC made that point to Wen.
While the US is preoccupied with the Iraqi fiasco, there is no question that the Washington Consensus is increasingly concerned over China’s "soft power" influence through foreign direct investment. From the perspective of other developing nations, Chinese foreign direct investment is welcomed since it doesn’t come with US political baggage such as promoting democracy or supporting Israel policies. The Chinese government only demands that trading partners respect the "One China" policy that excludes recognition of Taiwan as a nation state. Except for the Neo-conservative US ideologues, most everyone else considers Taiwan’s status as an internal issue among the Chinese people themselves to decide. Despite the failed CNOOC buyout attempt and the Blackstone share purchase, the vast majority of Chinese FDI targets the developing world especially in Southeast Asia and more recently Africa. China also provides the developing world access to cheap credit and inexpensive consumer goods, and many countries are enjoying rapidly rising revenues due to Chinese demand for their exports. Recent China FDI purchases include a Pakistan wireless phone provider, South African banks, Nigerian banks, Singapore oil services company, Peru copper mines, Kazakistan oil fields, and even a Japanese solar cell manufacturer.
DC for months (years?) you’ve been continually repeating yourself over and over and over again, but when confronted and your arguments shown to be factually incorrect, or based on spurious logic, you ignore the evidence and then proceed to grind your axe again.
Please Stop.
I guess you are tolerated here because RGE/B.Setser treat this more as a debate forum rather than their living room where shouting matches can occur amongst "guests", but I get the sense that that is discouraged and polite conversation encouraged — you might even find that you get your ‘point’ across better.
But here’s the thing. If no one believes you, shouting louder and spamming the board won’t change anyone’s mind and will in fact harden opinion against you and, perhaps by extension, China. Here’s a little friendly PR advice for you and China then…
http://www.opendemocracy.net/article/governments/how_china_should_rebrand_0
Like I can sort of appreciate rabid Chinese nationalism — your viewpoint — after centuries of Western (and more recent Japanese) domination, oppression, persecution, demonisation and patronising (an inferiority/victim-complex is bound to develop). However, you should understand that to non-Chinese it comes across as strident American jingoism does to a non-American, for instance. Plus I’m sure some Chinese themselves cringe at your attitude and posturing.
A lot of Chinese wounds are self-inflicted and blaming or scapegoating the West or Western Powers for them — or Western Media for reporting them (perhaps not always accurately) — says more about China’s backwardness, thin-skin, intolerance, xenophobia and paranoia than it does about, say, inherent Han superiority. It only serves to highlight the child-like, feminised stereotype of the "Chinaman" as emotional, prone to outbursts and unable to exhibit self-control.
Bottom line: B.Setser has graciously fostered a small community at the corner of the Internets where people can bring evidence and try to marshall it all into a model that hopefully resembles reality and then, based on the evidence, try to proscribe solutions to problems, if any, and where available. Your ‘program’ seems more to tout your model, disregarding and dismissing any evidence to the contrary, whilst systematically and categorically denouncing anyone who would object. Mao tried that and, may I submit, that way madness lies.
Sorry to be blunt, but please do yourself and everyone else here a favour and don’t be such a twat.
From Forbes:
China’s Multinationals Venture Abroad
http://www.forbes.com/leadership/managing/2008/05/05/china-emerging-multinationals-biz-cx_pm_0505notes.html
We know China’s emerging multinationals are venturing into the world in pursuit of natural resources, talent, technology, brands and customers. The only surprise is that they haven’t moved further and faster. This year, Huaneng Power International (nyse: HNP – news – people ) paid $3 billion for Singapore’s Tuas Power. Sinosteel launched a $1.1 billion hostile bid for the Australian mining company Midwest. Lenovo’s acquisition of IBM’s IBM (nyse: IBM – news – people ) personal-computer unit for $1.35 billion.
There are a host of minority stakes being bought. This has all caused unease, particularly in the U.S. Some of it has been general Western wariness about sovereign-wealth-fund money being on the move. Some of it is more specific to China: The rise of its economy is seen as a formidable challenge to the Americas. McKinsey consultants, writing in the McKinsey Quarterly, suggest "we ain’t seen nothin’ yet." Chinese companies, they say, are on the cusp of a significant period of foreign expansion, through mergers and acquisitions (M&A) and alliances involving taking minority stakes.
Guest,
I have always highlighted my opinions with direct quotes from a variety of referenced news sources. And yes, certain Western leaders are criminals that should be charged with war crimes over the illegal and racist invasion of Iraq. Western leaders are also guilty of many other violations of the Geneva Convention, the Charter of the United Nations, the Nuremberg Charter, International Law and the Constitution of the United States, including crimes against peace and crimes against humanity. The disinformation in the US mainstream media also especially applies to China with CNN and Fox News engaged as propaganda tools to denigrate the Chinese people. Blatant, falsified Videotape was presented to the American people regarding the Tibet Riots that burned portions of Lhasa and destroyed the minority Hui Moslem community. Was it also really acceptable behavior that Athletes carrying the Olympic torch were violently attacked in Paris France and San Francisco by protestors demonstrating freedom of speech?
VIDEO: The Tibet Riots: What Really Happened – Truth and Lies (Click to view Videos):
http://www.globalresearch.ca/index.php?context=va&aid=8693
http://www.globalresearch.ca/index.php?context=va&aid=8696
What is it with China now with the clowns in Washington ? Let’s add them to North Korea, Iran, Venezuela soon to be Russia as an evil axis nation ? China should have a right to invest particularly in the U.S. with the clowns that have depreciated the currency to the point where the whole country is up for sale.
Yes China should continue it’s international investments without criticism.
"What is it with China now with the clowns in Washington?"
Answer:
http://www.globalresearch.ca/index.php?context=va&aid=4379
In a second successful bid to tap Kazakhstan’s oil, China’s state owned CITIC Group has won approval from the Kazakhstani government to buy the Karazhambas oil field located near Aqtua on the Caspian Sea. China slakes oil thirst: Kazakhstan to sell field for nearly $2 billion (San Francisco Chronicle). The first success came in 2005, when Kazakhstan’s president, Nursultan Nazarbayev, approved of the sale of Petrokazakhstan to China National Petroleum (CNOOC) in 2005. As revealed in the San Francisco Chronicle report, both China-Kazakhstan deals have come at a steep price (that China is willing to pay), and over intense and continuous opposition from Washington and western oil consortiums. China has agreed to build and finance the proposed 2,000-mile pipeline from Kazakhstan to eastern Chinese border. The increasing Chinese stake in Kazakhstan is a particularly bitter defeat for a Bush administration now staring back at years of disastrous and blood-soaked failure. The US-China relationship is bound to become increasingly antagonistic, as the energy supply warfare intensifies, and US political losses mount.
war is peace… freedom is slavery… ignorance is strength… debt is capital
I’m trying to get my hands on this report which argues that Chinese soft power efforts are rather limited:
http://news.yahoo.com/s/afp/20080506/pl_afp/uschinadiplomacy_080506021812
Taking a tone of "ha! ha! we are taking over the world you American idiots" is going to likely create a backlash that actually makes it much harder for China to achieve its national interests. In particular, it’s very important for China to make it clear that its national interests aren’t in conflict with US power and hegemony and that China has no desire to challenge the West or the United States or even to be a superpower if it is in its national interest not to be.
Also I don’t think that it is useful to talk about the "right to invest." If the US doesn’t think it is in its national interests to allow Chinese investment in US companies, I see nothing wrong with blocking that investment.
CITIC’s investment in Kazahk oil would seem to be a clear case of using a state company for an investment that has national security externalities — China quite reasonably would pay a premium for oil that could be transported by pipeline to China rather than by tankers that travel through sea lanes controlled by the US navy.
2fish — the key difference is that the US government is making a decision about whether to allow firms to merge or whether to allow the sale of a US asset to a foreign investors (i.e. regulatory decisions), not a decision about what company to buy. In China, controls on outflows sort of blur that distinction, as regulatory approval is needed for outward investment in many cases. But even with the CIC and SAFE, it seems Wen ultimately makes the decision on big high-profile investments.
Jin — I don’t think the senior executives making the decision also run a (large) country, and are simultaneously making decisions about exchange rates and monetary policy and national security policy. No private investment by a US bank that I know of would lead the US state department to change where it holds its fx deposits …
Anonymous. Yes, the world can change — and if China wants to invest a large share of its foreign assets abroad in big stakes in foreign companies, the decision making process in china will need to change. getting every big decision through the state council is a bottleneck that slows the process down. Given that 7-8 years ago China was adding less than $100b to its reserves/ not running a big current account deficit, it would be foolish to think the world cannot evolve in big and radical ways. Predicting the direction of change though is a bit hard. I don’t think there is political consensus in either the US or Europe to sell $200b of US or European equity a year to China’s government. Unless that changes, China will face some constraints so long as almost of all of its external investment is in state hands (especially if the key decisions are still make close to the top).
DC — you have made your point about Tibet repeatedly. No need to keep repeating it.
Twofish,
The Washington Consensus is entirely responsible for placing the two cultures on the clashing path toward conflict. In a world of diminishing global energy reserves, the Chinese are increasingly viewed as a "strategic threat" for those natural resources across Africa, Central Asia, and Latin America. The Anti-China Darfur campaign has specifically targeted PetroChina investment in Sudan which produces light sweet crude oil. If there wasn’t any oil in Sudan, Washington would care as much about that country’s socio-economic situation as war torn Liberia that was established by returning slaves from the United States.
http://www.globalresearch.ca/index.php?context=va&aid=8841
" In Asia, despite the deepening US economic dependence on China to sustain to the rapidly depreciating US dollar (China holds $1.5 trillion dollars in foreign reserves which has lost 60% of its value since 2002), the US militarists still engage in sustained anti-Chinese propaganda campaigns and highly provocative incidents. US Intelligence Agencies have directed a political campaign against the expansion of Chinese investments and contracts (market-driven imperialism) in the Sudan. China’s market-driven empire builders ignore US military provocations because they had little effect on Chinese overseas and domestic economic expansion. "
Brad, I do not know where you get that. CDB needs the regulators’ clearence to go ahead. It speaks clearly that the country is not run by business. What I was saying is that CDB/CIC have little difference from a private company when it comes to invest in a foreign country. They have to examine the return rate, all kinds of risks and competing forces. The government deposit—it is called cross selling in business.
China and USA in New Cold War over Africa’s Oil Riches
Darfur? It’s the Oil, Stupid…
http://www.globalresearch.ca/index.php?context=va&aid=5714
The case of Darfur, a forbidding piece of sun-parched real estate in the southern part of Sudan, illustrates the new Cold War over oil, where the dramatic rise in China’s oil demand to fuel its booming growth has led Beijing to embark on an aggressive policy of—ironically– dollar diplomacy. With its more than $1.3 trillion in mainly US dollar reserves at the Peoples’ National Bank of China, Beijing is engaging in active petroleum geopolitics. Africa is a major focus, and in Africa, the central region between Sudan and Chad is priority. This is defining a major new front in what, since the US invasion of Iraq in 2003, is a new Cold War between Washington and Beijing over control of major oil sources. So far Beijing has played its cards a bit more cleverly than Washington. Darfur is a major battleground in this high-stakes contest for oil control.
Washington-backed NGO’s and the US Government claim unproven genocide as a pretext to ultimately bring UN/NATO troops into the oilfields of Darfur and south Sudan. Oil, not human misery, is behind Washington’s new interest in Darfur. The “Darfur genocide” campaign began in 2003, the same time the Chad-Cameroon pipeline oil began to flow. The US now had a base in Chad to go after Darfur oil and, potentially, co-opt China’s new oil sources. Darfur is strategic, straddling Chad, Central African Republic, Egypt and Libya.
Jin — there are (unconfirmed) reports the the state council coordinates among competiting Chinese investors — most notably by (per rumors) selecting chinalco as the vehicle for the bid for rio. who knows if that is true. But in general my point is that the CDB isn’t really calling the shots — China’s political leadership is.
and my point is that a private firm cannot usually draw on the government’s resources to cross-sell. tis hard to argue that the CDB acts like a private firm if government deposits follow its investments, isn’t it? no arms-length relationship there.
I also still find using the CDB — which still does i think a lot of policy related lending — as a vehicle for commercial investment odd, in the same way i find it odd that the CIC has strategic stakes in the state banks and stakes abroad. It sort of mixes functions, and makes it harder to argue that these institutions are not pursuing policy goals with their "commercial" external investments. And yes I realize that Chen yuan wants to transform the CDB … .
2fish — I agree re: no right to invest/ a sovereign right to review investment. China itself has been particularly keen to assert that right with regard to inward investment into China — remember, china has a very closed capital account. it has historically been open to greenfield FDI, but not to foreign takeovers of existing Chinese businesses. Any major investment i think needs government approval. the norm here is not unlimited and unrestricted access.
China’s Chalco and America’s Alcoa jointly made the bid for 10% of Rio Tinco. It wasn’t a policy decision of the State Council. While the State Council encourages overseas expansion by Chinese companies, it didn’t explicitly approve either the Chalco bid for Rio Tinco, or the CNOOC bid for California Unocal. I personally follow both Chinese companies because I own shares in both companies. Both are listed on the NYSE and Hong Kong stock exchanges. Not everything is 100% controlled by the State Council as foreigners tend to think.
Chalco
http://finance.yahoo.com/q/pr?s=ACH
CNOOC
http://finance.yahoo.com/q/pr?s=CEO
The neighboring Southeast Asian nations aren’t threatened by China, yet a growing population of Americans and Europeans thousands of kilometers away feel more threatened. Diplomatic relations between Russia and China are the best ever in world history with strategic cooperation. Southeast Asia is rapidly integrating into the Greater China Economic Bloc. Australia’s largest trade partner is China and the largest immigrant group of Chinese is transforming that country into a multi-ethnic society. Even India and China that fought border wars in the 1960’s have recently conducted joint military exercises. It seems that the further geographically distant from China, the more threatening China appears to many Westerners. What China’s rise does represent is the end of Western geo-political dominance to a multi-polar world order which is perhaps the real reason that the Washington Consensus so terribly fears the Chinese.
DC — note the telegraph article highlighting australia’s increasingly ambivalent attitude toward China that i linked to in the post. The aussies love the demand for their commodities, but are a bit less keen on Chinese investment in their commodity sector.
re: Chinalco. There was a lot of talk at the time of a CIC bid for Rio Tinto, or a bid by another state firm. Supposedly — and this is a rumor — Chinalco was picked as the vehicle. That is just a rumor, i don’t know whether it is true. And I am not sure how Alcoa played into the entire process. I haven’t found anything better on the overall story than the McGregor piece I linked to …
McGregor on the "Why Chinalco" question:
"Many have wondered why Chinalco has taken the lead on the issue, when, in theory, it is the merged BHP/Rio entity’s potential grip on the iron ore market that worries the Chinese the most. The most likely reason is that Chinalco has won the confidence of top leaders as one of the best-performing enterprises, by building a diversified business offshore and consolidating the energy-guzzling industry at home."
the key point to me is that Chinalco was picked to bid on rio tinto by China’s top leaders. Others would say it was picked b/c it was the best-run and most commercially sucessful, so the beauty contest inside the state matched a market outcome ..
Mcgregor also notes that having paid a market price for rio, China wouldn’t want to use it (assuming it could) to push down the price China pays for iron as that would cut into the value of china’s investment — i.e. China, Inc’s interest as a consumer and its interest as an investor conflict. I am not sure that is always the case — China has used state cos as a vehicle to provide consumer subsidies (the petrol companies now), tho the companies in question don’t necessarily like this. And if China might prefer losses on a rice import/ export company to higher rice prices and social instability.
"Australians are a bit less keen on Chinese investment in their commodity sector."
That is understandable. The Chinese just want a seat at the inner table when commodity prices are negotiated. For instance, China CNOOC’s 10% equity stake in the massive Australian Gorgon Gas reserves, permits a fair price to be negotiated. A Chinalco 10% equity stake in Rio Tinto provides a similar bargaining leverage for Iron ore.
Australia’s New Prime Minister from the Labor Party is more Pro-China and actually speaks fluent Chinese. President Bush didn’t have much to say when the Prime Minister Kevin Rudd announced the complete withdrawal of Australian forces from the Iraqi hellhole. A New World Order is quite clear when the Prime Minister of Australia announces the withdrawal from the Anglo-American Military coalition in the Middle East. Canada also has a growing immigrant population from Asian nations who don’t support the US Geo-political foreign policy agenda.
I find DC’s posts interesting and welcome even if he is a bit repetitive. There is a lot of China bashing, disguised sometimes as "helpful criticism", from a US that feels threatened by its rise to power. He does harp on the faults of the US, but these faults are real and exist and I suspect some of the dislike of his comments is due to his comments hitting Americans’ raw nerve.
Why doesn’t someone calculate whether China has lost more money with its equity investments in the US or with its investments in US Treasuries. I would guess it has lost more on the Treasuries. But someone like Brad would have to do the calculations, if they are possible.
bsetser: But in general my point is that the CDB isn’t really calling the shots — China’s political
leadership
In all of the major mergers that I’ve seen, the people very much pushing it are people in the state-owned enterprises who are pushing mergers for much the same reasons that large corporations in the US like mergers. The role of the Chinese government is like the role of the US government, to say no when it thinks that the merger isn’t in the public interest. The State Council really is not set up to say yes, only say no.
bsetser: I also still find using the CDB — which still does i think a lot of policy related lending — as a vehicle for commercial investment odd, in the same way i find it odd that the CIC has strategic stakes in the state banks and stakes abroad.
CDB does not like being a policy bank and has received permission to become a commercial bank. The trouble with policy lending is that it might be good for the government, but its not profitable for the bank.
bsetser: the key point to me is that Chinalco was picked to bid on rio tinto by China’s top leaders.
More likely it was because Chinalco wanted to do the acquisition and no one else did. It really doesn’t make any business sense for CIC to do it, and it also doesn’t make any business sense for any other state firm to do it.
bsetser: the key difference is that the US government is making a decision about whether to allow firms to merge or whether to allow the sale of a US asset to a foreign investors (i.e. regulatory decisions), not a decision about what company to buy.
And as far as anyone knows, the State Council doesn’t make that sort of decision either. People come up with a proposal of something they want to do, and the State Council says yes or no. The State Council doesn’t have the staff or expertise to go out and proactively figure out which companies to buy. They can only say no, which isn’t that different from the power Bush has to block a merger under Exon-Florio.
I would think from a Chinese point of view the worst possible investment would be US Treasuries. It loses due to the decline in value of the $ and in addition it loses due to US inflation. With US equities, at least there is the chance of reversing the losses with patience. Question: what amount of Chinese investment in US equities would prompt US resistance? If China bought 3-4% of each of the 100 largest US companies, by market cap, would that stir up the Congress, or not? Over 5% might, but under 5 might pass without alarm. What do you think Brad?
DC: The Anti-China Darfur campaign has specifically targeted PetroChina investment in Sudan which produces light sweet crude oil.
And this is an example of how the Chinese government and SOE’s really don’t see eye-to-eye. The Foreign Ministry would much prefer if PetroChina got out of Sudan.
1-2% probably wouldn’t produce too many worries if it was spread thinly and invested through index funds — something close to 5% built up quickly would imply a huge swing in capital flows and if done visibly would generate in my view more than a bit of worry.
incidentally, so far China’s US equity investments have done worse than their treasuries — just look at Morgan Stanley and Blackstone’s share prices. Blackstone has been the one that really hurt. And China is probably close to flat on the US equities (portfolio equity) it bought in 07.
treasuries offer guaranteed losses or close to it in rmb terms (china should worry more about $ depreciation than us inflation in my view, tho that can be debated); equities carry with them the risk of dollar losses and thus even bigger losses in rmb terms.
Guest: Question: what amount of Chinese investment in US equities would prompt US resistance?
That depends on the specific equity. One thing that is interesting is that in situations where people have been screaming over an acquisition, there has been some US company that benefited from the screaming. So a lot of the screaming that you hear with Chinese acquisitions involves some US company playing political hardball.
incidentally, so far China’s US equity investments have done worse than their treasuries —
Perhaps percentage wise, but given that the investment in Treasuries has been vastly greater than that in equities, I would think in dollar terms the bond losses would be greater.
in absolute numbers, sure, if the losses are measured in rmb — but that isn’t saying anything really as at least 95% of china’s US portfolio is in bonds. what matters is the relativel performance of the two assets in dollar terms, china’s risk tolerance and politics.
I keep arguing that the institutions china uses to invest in the us (And europe) likely will matter — and that institutions that operate at arms length from the state and invest in things like index funds will generate less opposition than institutions that operate in ways that seem directed by the top leadership and invest in specific companies. so far tho china hasn’t followed my advice!
2fish — CDB made the chinalco loan (presumably using funds supplied by the CIC), and per mcgregor it does a lot of policy lending in africa to support china’s efforts to acquire resources. that is more than a few steps away from being totally commercial in my book.
bsetser: that institutions that operate at arms length from the state and invest in things like index funds will generate less opposition than institutions that operate in ways that seem directed by the top leadership and invest in specific companies.
I really don’t think that this will be the case. People don’t have an abstract interest in good corporate governance, and people will decide whether Chinese investment is a good or bad thing based on self-interest when whether they like China or not. If someone doesn’t like China or has a good reason to block a deal, I don’t think that there is anything that the Chinese government can do to satisfy them, and there comes a point where it’s not worth even trying.
Also passive index investing is just plain impossible for a fund that is as large as CIC, so there’s no real point in discussing whether it is a good thing or not. It just can’t be done.
If you were to split your stock among the SP 500, then you’d up $400 million per company, and there isn’t enough liquidity for most of the SP500 companies to allow this sort of transaction on the open market. Trying to even track changes in the index, you’ll end up with an elephant swimming in a kiddie pool.
While I enjoyed Sender’s piece, it doesn’t match particularly well with the version I heard earlier this year here in Shanghai. In short, that ran: CIC, with Blackstone and MS in pocket already, wasn’t very keen on taking a Citi stake and, when Citi tried to limit their ability to DD, decided to walk away. When CDB (who CIC own (or have reserved to own) the largest minority stake in) got hot for the deal, CIC told the CBRC and State Council "We don’t want it, directly or indirectly." A CDB/Citi deal was dead at that point, regardless of advisors’ enthusiasm for it, and CDB appear not to have realised that fact until it was rammed home. (I’m told that GIC and KIA, incidentally, laughed off Citi’s attempts to limit DD – they were both advised.)
By saying no, the State Council reaffirmed CIC’s position as the guys who have a permission bias to do this kind of deal. They also reminded CDB’s management – largely at the behest of CBRC, who also though the deal should be CIC’s or no-one’s – that their attention should be on internal restructuring that leads to things like a viable business plan, a clean balance sheet and a listing path, not shopping sprees at Tiffany’s…
On CIC/Rio: CIC has made it pretty plain (domestically at least) that they don’t intend to act as a stalking horse/Aunt Sally for any other Chinese org (SOE or otherwise): what they buy, they’re buying for their own books. SAFE, on the other hand, may still be for hire…
"china should worry more about $ depreciation than us inflation in my view, tho that can be debated"
I think China should worry more about U.S. inflation. If they shop in the U.S., the decline in what they can buy with their dollar assets is determined by U.S. inflation relative to the rate of interest they get on their assets. Dollar depreciation should, in the long haul, be matched by changes in purchasing power parity. So, if the dollar maintains its worth relative to goods in the U.S., it should also do so against goods in other countries.
I wonder if it peeves China that Ben seems to be trying to fool markets into believing that inflation will remain low, so that interest rates stay low, while allowing substantial price increases. With negative real interest rates, he is shrinking the value of the U.S. debt held by foreigners.
MMcC — thanks for the comment. The CIC may be buying for its own book, not for other SOEs. But does that also apply in reverse? CIC funds go to CDB in Dec. CDB lends to Chinalco in Jan … Chinalco buys Rio. And there was a fair amount of speculation at least in the press that the CIC — or perhaps someone in China’s government — was interested in Rio, or at least interested in getting some say in outstanding bid for Rio that would have consolidated the Aussie mining sector.
I don’t claim to begin to understand it all, but it does seem like the Chinalco bid was the product of a bit more than a Chinalco decision that it liked iron ore cos.
Incidentally, what role would you expect the CIC to play in the resources sector? the CDB? the SOEs? There was a lot of talk that the CIC should be doing more at one time, but so far there hasn’t been any big investments …
p.s. I am a bit less impressed by the GIC/KIA and ADIA’s due diligence re: Citi than you are. And what of the GIC’s due diligence on UBS? I honestly don’t know how you could do adequate due diligence tho without a lot more time and a ton of resources … it isn’t even 100% clear that the top management of many banks really understands their balance sheets.
In the case of CDB, I think one has cause and effect reversed. CDB got a cash infusion in order to pay off all of the policy loans that it had been forced to make earlier. A policy loan by definition is a money loser, since if was a money maker, you wouldn’t need the government to force you to make it.
Since CIC is the major shareholder for CDB, if CIC thought that a deal was bad, then it makes no sense for CDB to take it. There is a bias in these deals since corporate management likes big M&A deals. The bigger your company, the bigger your office and the bigger your salary, and it makes sense for a CEO to be in charge of a big unprofitable company rather than a small profitable one, since after all, his salary is a loss to the company.
bsetser: Incidentally, what role would you expect the CIC to play in the resources sector?
None really. There was talk about making CIC the strategic investment arm of the government back when people were trying to figure out what to do, but having CIC invest heavily in resources contradicts its purpose of being China’s retirement savings program.
This isn’t to say that China won’t be making strategic mineral investments, but those investments are likely to be made by mining companies since those companies have the expertise to spot a good deal and walk away from a bad one. The question is what role the Chinese government should play in brokering these deals, and my personal feeling is that it shouldn’t play much of a role. If a resource deal doesn’t make sense in pure commercial for-profit terms, then one has to ask why its in China’s national interest to make it at all.
In the Chinalco/Rio situation, I don’t think that anyone has argued that the deal doesn’t make commercial sense, and that Chinalco is going to make money off of it, and I haven’t heard anyone argue that the financing terms that CDB gave Chinalco were perferential. I also think that the fact that Alcoa was involved was crucial for the deal’s success, since having another partner reduces the chances that you’ll can hammered.
One other interesting thing is that the state holding company that manages the central government’s share of Chalco only holds 40% of the shares. The other 60% is held by a mix of banks, Alcoa, provincial governments, and private shareholders. The structure of Chalco is very much that of a money-losing SOE that was restructured. The fraction that the banks got was during the 1990’s when they traded bad debt for worthless stock.
bsetser: "I don’t claim to begin to understand it all, but it does seem like the Chinalco bid was the product of a bit more than a Chinalco decision that it liked iron ore cos."
I don’t claim that Hu Jintao understands it all… I think occasions where a relatively commercial Chinese operation and some Chinese policy groups have a common interest will be helpful in setting out more clearly which funder does what for whom. My own belief is that the trend is heading more-or-less towards placing the commerical interests first and picking the funder on the basis of which lender’s long-term role will be least compromised by putting their money in the pot. CDB are a good example of how compromised a semi-policy lender can become.
bsetser: "Incidentally, what role would you expect the CIC to play in the resources sector? the CDB? the SOEs? There was a lot of talk that the CIC should be doing more at one time, but so far there hasn’t been any big investments …"
I think few fund managers would consider resources to be the best source of bargain buys right now, and I don’t think CIC is likely to see it differently. Should they want a serious long-term exposure to resources, they might indulge their tolerance for long and lumpy returns the way the Alberta pension fund is (and the way NCSSF has done in infrastructure in the past) by investing as partners in development trusts. Similarly, if CIC goes in for trust-based infrastructure investments (following NCSSF’s lead), I think a lot of those rails, roads and ports are going to lead to mines, plantations and wellheads. While I have trouble seeing resources playing a major role in CIC’s portfolio of directly-held companies, I think CIC’s desire to hold an outsize proportion of emerging equity third-party managed funds will give the overall portfolio better-than-average exposure to resources.
CDB will certainly be one of the bankers competing to funds overseas expansion of China’s resource companies and its policy lending background leaves it very well connected there, as does its strong relationship with StanChart. Most Chinese SOEs are hot for overseas expansion but, equally, they know the extent to which a badly-received deal in the early days will take future opportunities off the table. One of the reasons Chinese resource SOEs are infesting Africa right now is that African governments are among the few who welcome them… Resource SOEs are, in my view, more than a little frustrated right now but not enough to do anything rash, like risk a political smackdown.
bsetser: "I am a bit less impressed by the GIC/KIA and ADIA’s due diligence re: Citi than you are."
Just saw this. It may have been due, it wasn’t particularly diligent and, in my view, it’s just a bet that any form of a surviving UBS/Citi will be worth substantially more in five years than it is today. I’m unimpressed with the quality of the bet but I like that GIC/KIA told Citi to stop talking bollocks and let their advisors see the books.
MMcC on 2008-05-07 01:50:09
I like that GIC/KIA told Citi to stop talking bollocks and let their advisors see the books.
Hate to be the contrarian but that isn’t quite due diligence is it? Looking at Citi’s books are basic , run-of-the-mill procedures, in the case when Citi’s models and therefore reported values are questionable, that no one thought of re-looking at marked to model and recognition issues before sinking $ into the organisation is unthinkable unless, they are pretty sure however bad real figures are, Citi will survive (yep, that too big to fail line of thought). These days, it’s no longer enough to punt (sorry, put, but you get the idea) your money on something that looks good on the surface but is filled with formaldehyde on the inside
Brad
Not sure if my reading of the situation is anywhere near correct, but could the "increasing dare to invest" without first getting permission (though final permission phase is clearly still there)be a sign that it’s tacit nod in the liberalisation direction. After all, if everything went in the get permission first before you do anything direction, there would be no conflicts, (unless power struggle becomes obvious) and obviously no initiative.
BTW, posted on your goldman post – not sure why it appeared as by"-" but here’s the blog address you requested ; please do bring any erroneous material to my attention by email- the comment system is shot (everyone who tried to post has complained!)- foesskewered.livejournal.com . Warning, not very intellectual by any stretch of the imgaination, so consider yourself warned!
"I suspect the inner core of the State Council is a more powerful group"– This group is called the Central Finance and Economic Leading Group, which is a party organ headed by Wen Jiabao. Members include Wen, Wang Qishan (VP), Zhang Dejiang (VP), Hui Liangyu (VP), Ma Kai (secretary general of SC), Zhang Ping (NDRC), Xie Xuren (MOF), Zhou Xiaochuan (PBOC), Li Rongrong (SASAC), and possibly Li Yizhong, head of the newly formed Ministry of Industry and Information. Note that traditionally, heads of the regulators (CSRC, CIRC, CBRC) were not members of the leading group.