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!

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.

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.

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.

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 …

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.

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…