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The CIC, the world’s best performing sovereign fund?

by Brad Setser
October 29, 2008

To date, the CIC hasn’t exactly distinguished itself with its investment acumen. Its investments in Blackstone and Morgan Stanley are underwater. Its Blackstone shares are down something like 75%.

Even its “safe” investments haven’t been safe: it put money in the Reserve Primary Fund — the money market fund that famously broke the buck.

But it almost certainly has outperformed other sovereign funds this year. Its winning strategy?

Cash. Lots of it. SWF Radar highlighted a Thomson Reuters report that indicated:

[the] “CIC has been very stable so far, because at a time when global stock markets are dropping dramatically, it has more than 90 percent of its assets in cash,” the official Shanghai Securities News cited Lou Jiwei, head of CIC, as saying.

Apparently the CIC didn’t put most of its money to work. Which, if nothing else, means it didn’t lose all that much.

On the other hand, it really isn’t necessary to create a sovereign fund just to invest in money market funds.

A final bit of pure speculation: I wonder though if the CIC might have had a fair amount in some of Morgan Stanley’s money market funds. That might have contributed to Morgan Stanley’s decision to come to the assistance of its money market funds. This though is pure speculation on my part.

46 Comments

  • Posted by baychev

    your argument hardly makes the point for a good investment strategy. they are keeping cash because they are way too indecisive not becuase they’ve foreseen what was coming. look at their investments: they all were terribly timed and with the exception for a week or two after the initial purchase have been in the red.

  • Posted by gillies

    the CIC has presumably only done badly if it has had to sell any of those early investments. it may choose to hold. in fact this was probably the original intention.

    and like a child at the racetrack – to lose your first couple of bets may anyway be the best thing that can happen to the CIC.

    as for the cash, if it can now buy more – oil for instance, or equities, wheat, copper, pork . . . . why should they worry too much if that is lucky timing or a reward for saving hard and prudently ?

  • Posted by df

    well done CIC

  • Posted by DJC

    Relentlessly bashed by the Chinese internet bloggers and even criticism from high ranking party officials after the awful Blackstone investment, the CIC will be very conservative with any future investment. The Japanese real estate bubble left their economy in deep recession for a decade or longer. It will take at least that length of time for the US Economy to recover from the asset bubble capital misallocation excesses. For the China CIC, instead of lackluster investments on Wall Street, they should be looking East at Asian financial markets for higher capital returns.

  • Posted by DJC

    Quote of the Day from Economist Joseph Stiglitz:

    This crisis will certainly leave its mark on America.

    “Our credibility has been destroyed,” said Joseph Stiglitz, a Nobel Prize-winning economist at Columbia University. “There will be a fundamental change in the role of the U.S.”

    “For starters, it’ll be a long time before a U.S. Treasury Secretary can go over to India or China and tell those countries how they should run their banking systems.”

    http://money.cnn.com/2008/10/29/news/economy/america_superpower/index.htm?postversion=2008102911

  • Posted by fatbrick

    Investment performance is a relative definition. Look at your benchmark, Brad.

  • Posted by Twofish

    baychev Says: your argument hardly makes the point for a good investment strategy. they are keeping cash because they are way too indecisive not becuase they’ve foreseen what was coming.

    No. More prudence than indecision. The Chinese government tends to move slowly on economic ussyesbecause they know that things will have unforseen consequences.

  • Posted by Twofish

    DJC: For the China CIC, instead of lackluster investments on Wall Street, they should be looking East at Asian financial markets for higher capital returns.

    I don’t see why. East Asian markets haven’t had higher capital returns, and then haven’t been prone to any less bad decision making than the US.

  • Posted by DJC

    Twofish writes, “Asians haven’t been prone to any less bad decision making than the US”

    Oh really?

    Writes even Businessweek, “Prime Minister Wen’s optimism about the Chinese economy is not completely misplaced, according to Tao Wang, economist in Beijing with UBS. “Chinese banks have little direct exposure to toxic assets abroad and have not experienced a domestic credit boom,” he writes in an Oct. 16 report. “There is plenty of liquidity in the system.” Moreover, adds Wang, China has more than $2 trillion in foreign currency reserves to provide a cushion in case the credit crunch prompts an outflow of capital.”

    http://www.businessweek.com/globalbiz/content/oct2008/gb20081029_222670.htm?chan=top+news_top+news+index+-+temp_news+%2B+analysis

    :-) LOL.

  • Posted by credulous_prole

    Guys, isn’t Blackstone just a conduit for Chinese ownership post-US bailout come G20 meeting?

  • Posted by Twofish

    DJC: Twofish writes, “Asians haven’t been prone to any less bad decision making than the US” Oh really?

    Yes really. The only reason China is making reasonably good economic decisions now is that it has spend the last 150 years making bad or horrific decisions. The history of China is one of dynastic cycle in which one group of rulers make good decisions which leads to arrogance which leads to bad decisions which leads to disaster which leads to good decisions.

    China has had a massive real estate and stock market bubble and the only reason that the leadership has been able to avoid disaster is that they don’t get arrogant and don’t think of themselves as smart or infallible. The very second you start congratulating yourself is the very second you start to fall apart.

  • Posted by Twofish

    The Chinese government has made plenty of stupid decisions. The key was that they weren’t *fatal* stupid decisions and they were able to learn from them and make less stupid decisions the next time around.

  • Posted by DJC

    Twofish,

    The mismanagement of monetary policy by the Federal Reserve isn’t fatal to the United States; it simply translates to a prolonged deep recession similar to the Japanese 1990′s experience. While China’s GDP powers ahead becoming the largest economic power in the coming decade measured by PPP, the US Economy is trapped in economic stagnation from asset bubble capital misallocation. We are simply returning to historical normalcy when China’s economy for centuries was the largest in the world except for the past 150 years of Western colonialism. It’s already baked into the cake !!!

  • Posted by Twofish

    DJC: It simply translates to a prolonged deep recession similar to the Japanese 1990’s experience.

    The economic consensus is that by moving slowly Japan in the 1990′s made the recession far longer and more painful than it needed to be. The Nordic nations which had a similar banking crisis went through a recession but it only lasted one or two years. Also the S&L crisis was associated with a recession, but it wasn’t a long one.

    DJC: While China’s GDP powers ahead becoming the largest economic power in the coming decade measured by PPP, the US Economy is trapped in economic stagnation from asset bubble capital misallocation

    1) Chinese growth could stall because of bad management. The US economy could change in a rather short time (i.e. 1979-1984)
    2) Even if you assume the most optimistic projections the US will still have more comprehensive national power than China until about 2050 at the earliest

    DJC: We are simply returning to historical normalcy when China’s economy for centuries was the largest in the world except for the past 150 years of Western colonialism. It’s already baked into the cake !!!

    The empire long united becomes divided and the empire long divided becomes united. Nations rise and fall and there is no equilibrium or return to normalcy.

    Also China has had periods of economic collapse. The 18th century was good for China, but the 12th century and 4th century were not.

    History owes you nothing. It doesn’t matter how grand or glorious China’s past was, people can make bad decisions and lose all of it.

  • Posted by Chidambaram

    I wonder if CIC knows that assets = liabilities.

    If they do they won’t be fooled into sitting idle for too long, and will go long in more stocks other than those of Lord Rothschild.

    Twofish:

    The problem with netting is the time element. Suppose you have a $10,000 checking account with the bank and you own the bank in $10,000 in credit card debt, and you have a “netting” contract in place. The bank goes under.

    Great!!! You don’t lose anything from the deal since the credit card debt cancels the check account. Not great!!!! Since you no longer have a checking account to pay the bills, and your credit card doesn’t work any more. You are now totally hosed even though you and the bank owe each other nothing.

    Twofish, for your own benefit please go over your own example again.
    In the above example, you’re right in saying that you and the bank don’t owe anything to one another.
    But you didn’t lose ‘nothing’.
    You actually lost $10,000. You had $10,000 in stock, $10,000 in a checking account and a credit card loan payable of $10,000 to start with; and now you have nothing.
    Assuming a simple world where you bought the stock through the same bank’s very first IPO at its face value, now your $10,000 is sitting in their ‘paid up equity capital’ bucket.
    In this simple world with only two fish, Twofish and his Bank, if the bank’s deposits = advances= $10,000, they have your $10,000 in capital left with them.

    Twofish example # 2:

    You have a house that you thought was worth $500,000. Turns out that everyone now thinks it is worth $250,000. You lose money. No one makes money from the transaction.

    I bought the house from Twofish when it was worth $500,000 and as it turns out I’ve lost $250,000 according to the Twofish ‘mark to market’ loss calculation. Notice how he cleverly hides away my 500,000 rabbits and borrows $250,000 * 15 from the Fed.

  • Posted by Twofish

    Charam: You actually lost $10,000. You had $10,000 in stock, $10,000 in a checking account and a credit card loan payable of $10,000 to start with; and now you have nothing.

    If you have $10,000 in stock + $10,000 and cash – $10,000 in a loan, and the cash and loans cancel you have exactly the same equity.

    Charam: I bought the house from Twofish when it was worth $500,000 and as it turns out I’ve lost $250,000 according to the Twofish ‘mark to market’ loss calculation.

    Which you did.

    Charam: Notice how he cleverly hides away my 500,000 rabbits and borrows $250,000 * 15 from the Fed.

    If you paid $500,000 in cash from your own account, then yes that money is still there. However, chances are you didn’t.

    What happened was that the bank looked at your collateral and then put $500,000 in my checking account, and then added to their books a loan for $500,000.

    If the house is now worth $250,000, you won’t pay and I want to take $10,000 from my checking account, then we have a problem, since that $500,000 in my checking account was money that was never really there.

  • Posted by DJC

    Twofish,

    Just a few months ago, the US Economic consensus among Wall Street pundits was that the American finance capitalist system was far superior to state-driven Asian economies. Wrong it appears! Not the Chinese economy, but the US financial sector imploded in a credit crisis from excessive debt. The US government bailout strategy is doomed to failure simply because it ignores the fundamental problem of US asset overvaluation.

    Every step by Paulson in reaction to the credit crisis was to prop up select distressed firms deemed too big to fail and support failing markets as they occurred, hoping in vain that it would be the last move needed to resolve the systemic crisis to put the economy on a path of recovery.

    The disjointed interventions appeared designed to keep a collapsing debt bubble from collapsing. Even “bubbles” Alan Greenspan was not naive enough to try. Greenspan merely replaced a burst bubble with a new bigger bubble, but never tried to keep stop a collapsing bubble in mid course. Greenspan’s approach was that of a post disaster cleanup crew, not rushing into a collapsing structure as the current bailout team appears to be trying to do. Throwing good money after bad merely turns good money into bad. :-) LOL.

  • Posted by Twofish

    Charam: Notice how he cleverly hides away my 500,000 rabbits and borrows $250,000 * 15 from the Fed.

    No I can’t do that. If you deposit $500,000 into a checking account, I can only loan out $450,000. I have to keep the rest as reserve. If you invest $500,000 as a stockholder and I put all of that into capital reserve, then I can lend out $5,000,000.

    If you want to borrow $450,000, I can dump the money in your checking account, but I have to pull $50,000 out of reserves. I can sell some of my loans. The reason I can do that is that I have a loan that is work $450,000 and the numbers work out, if you want your $450,000 I can sell the loan to someone.

    Now if the loan isn’t worth $450,000 and I can’t sell the loan, then we have a problem.

  • Posted by DJC

    The Paulson plan is plunging the US Economy into a prolonged Japanese style recession because the value of the toxic subprime assets are been kept at unrealistic levels by government intervention. Paulson is permitting banks to continue with their “mark-to-model” nonsense of valuating subprime assets at 70-80 cents on the dollar when the “real mark-to-market” valuation is between 18-30 cents on the dollar. Fraudulent valuation of financial assets merely prolongs any eventual recovery for the US Economy.

  • Posted by Twofish

    DJC Says: The US government bailout strategy is doomed to failure simply because it ignores the fundamental problem of US asset overvaluation.

    On the contrary. It’s dealing with the problem head on. Once you revalue all of the assets to their correct values, you end up with lots of insolvent institutions. At this point you do what is the equivalent of a bankruptcy proceeding. The first thing you do in a bankruptcy is to flood the bankruptcy company with emergency cash and loans to maintain operations.

    DJC: Every step by Paulson in reaction to the credit crisis was to prop up select distressed firms deemed too big to fail and support failing markets as they occurred.

    Precisely. This is what you do in a standard bankruptcy procedure. The problem is that we have lots of people saying “let the firms fail” who really have no idea what a corporate failure looks like.

    A bankruptcy goes like

    1) arrange debtor in possession financing
    2) put the company under the control of the government
    3) remove management if they are incompetent
    4) figure out how to salvage as much value as possible

    DJC: The disjointed interventions appeared designed to keep a collapsing debt bubble from collapsing.

    No. It’s to have it collapse in an orderly way.

  • Posted by DJC

    Twofish,

    Once the Fed gets to ZIRP, though, we enter the world of string-pushing. Velocity drops off because everyone is repairing credit lines and paying down debt. Leave that stage alone, and you get an ugly couple of years, to be sure.

    Start meddling more, as Hoover and FDR did, and you get a lost decade. Like Japan. Only it be worse with valuation of financial assets.

  • Posted by DJC

    Twofish,

    Once the Fed gets to ZIRP, though, we enter the world of string-pushing. Velocity drops off because everyone is repairing credit lines and paying down debt. Leave that stage alone, and you get an ugly couple of years, to be sure.

    Start meddling more, as Hoover and FDR did, and you get a lost decade. Like Japan. Only it be worse with fraudulent valuation of financial assets.

  • Posted by Twofish

    DJC: The Paulson plan is plunging the US Economy into a prolonged Japanese style recession because the value of the toxic subprime assets are been kept at unrealistic levels by government intervention.

    No they haven’t. If you wanted to keep the assets at unrealistic levels then there is no point in buying them from the banks. The whole point of the plan is to exchange bad assets for good cash, and have the government absorb the losses.

    Also revaluing assets won’t save you in a banking crisis. Once you start having bank runs, then you have to convert the assets into cash, at which point they are no longer abstract numbers on a ledger, but something that you have to convert to crisp green paper to give to the mob at the door.

    DJC: Fraudulent valuation of financial assets merely prolongs any eventual recovery for the US Economy.

    OK. You revalue the assets, at which point a lot of banks are underwater, and have to close their doors. Now what?

  • Posted by DJC

    DJC: The Paulson plan is plunging the US Economy into a prolonged Japanese style recession because the value of the toxic subprime assets are been kept at unrealistic levels by government intervention.

    Twofish: No they haven’t. If you wanted to keep the assets at unrealistic levels then there is no point in buying them from the banks. The whole point of the plan is to exchange bad assets for good cash, and have the government absorb the losses.

    DC: In order to purchase all of the troubled assets, the government would require multiple trillions of dollars, well in excess of the initial $250 billion in the bailout bill. A single corporation, General Motors itself is lumbering under $500 billion of debt, and General Electric is slowly being suffocated under a comparable $500 billion of debt. The Paulson’s plan is permitting the banks to market their entire troubled asset portfolios to the unrealistic levels established by government purchase of subprime securities (ie. 70 cents on the dollar rather than the market 18 cents on the dollar). The fraudulent valuation of financial assets by “mark-to-model” nonsense will lengthen and worsen the recession by frightening off any potential private capital investors from the US and especially overseas.

  • Posted by Twofish

    DJC: Once the Fed gets to ZIRP, though, we enter the world of string-pushing. Velocity drops off because everyone is repairing credit lines and paying down debt.

    So have the government directly issue credit and wipe out debt. Massive fiscal expansion. Drop cash from helicopters. Send out the National Guard and force bank CEO’s at gunpoint to lend money.

    DJC: Start meddling more, as Hoover and FDR did, and you get a lost decade. Like Japan.

    A lost decade is politically unacceptable. If you can’t find national leadership that will fix the problems, they they should step aside for people who at least want to try something different.

    My belief is that functioning market economies require huge amounts of government intervention and meddling to work properly, so the current actions of the government are what is needed, and they are very similar to the actions that the Chinese government took to fix their own banking crisis.

    The thing about your economic philosophy is that it seems to be ideologically incoherent. One second you are screaming against the Washington Consensus but the next second you are advocating precisely their failed policies. One second you seem to be for active government intervention, but next second you are against it.

    Personally, I think that the Chinese government did a wonderful job in the 1990′s at fixing the banking crisis, and probably more by accident than design, Paulson is ending up creating a system that looks quite a bit like China’s banking system.

  • Posted by Twofish

    DJC: In order to purchase all of the troubled assets, the government would require multiple trillions of dollars, well in excess of the initial $250 billion in the bailout bill.

    I don’t think that the bill is nearly that big, but if it is, then so be it.

    DJC: The Paulson’s plan is permitting the banks to market their entire troubled asset portfolios to the unrealistic levels established by government purchase of subprime securities (ie. 70 cents on the dollar rather than the market 18 cents on the dollar).

    Right. This is exactly what China did to recapitalize its banks. It bought up non-performing loans at face value even though they were worth $0.15/$1. The whole point of this is that if you overpay, the banks will get rid of their worst assets and keep their best ones. The government takes and equity stake to make up for the loss, but at this point the government salvage what it can out of the junk.

    If you keep the assets on the banks books, they will do “evergreening” which is to just extend the terms of the loans, which wastes capital. If you want the banks to get rid of their junk, then you knock on the door, and say “I’m paying you $0.25 + equity for whatever crap you can give me” and the banks will go through and find their worst loans and dump them on you. That’s what you want them to do if your purpose is to get rid of junk loans.

    DJC: by frightening off any potential private capital investors from the US and especially overseas.

    Excuse the language, but this is the same b*ll that the IMF and the Washington Consensus used to spout. If you get your economic house in order, then you won’t have any problem getting foreign investors.

  • Posted by Chidambaram

    Twofish:
    If you have $10,000 in stock + $10,000 and cash – $10,000 in a loan, and the cash and loans cancel you have exactly the same equity.

    Twofish, in example #1 we’re assuming only you and the bank are there, for simplicity. In case of example #2 I assumed a simple deal where you sold me the home. Bringing the bank into example #2, you still get the same result.

    Assets = Liabilties.

    Example #1:
    You have $10,000 in the bank’s stock, $10,000 in cr card loan and $10,000 in a checking account.
    When the bank goes under your stock is worth zero, plus your loan and checking account cancel one another out, so you lost $10,000.
    The bank has the $10,000 in their capital.

    Example #2:
    The total reduced recovery losses are at most $100b for the US, whereas you can go back to the Bank of England’s report and actually have a look at their data for losses and response.
    1) Bank of England show huge losses in various securities such as investment grade corporate bonds and ABS-CDOs, etc. None of the securities listed in the ‘losses’ are a simple ‘home loan’.
    2) They show a correspondingly huge expansion in the Fed, ECB and BoE balance sheets for the rescue.
    You have to remember that even in the previous crisis, where NASDAQ fell to 25% of its value, the overvalued internet stocks didn’t cause any rabbits to disappear. Total rabbits remain the same before and after a crisis.

  • Posted by Cedric Regula

    Chid:

    At the risk of beating a wabbit to death, I had a few dead bunnies after the 1999-2002 stock bubble popped and it was Worldcom that killed’em.

    The stocks markets lost $8T of our furry friends before they were done correcting in early 2003.

    It was Greenspan and Congress fixing that problem by expanding the bunny supply, starting the housing bubble, keeping it going with the twin deficits(enticing the Chinese to buy GSEs because the Chinese knew that was the direct route to financing consumers buying home appliances, etc…) and higher conforming loan limits then finally Wall Street invented structured finance to cover up the fact that we ran out of credit worthy borrowers in the US, and sold them worldwide to anyone they could sucker. They’re insured to. (Sorry, can’t get over that one.)

    That and 5 years of work finally re-flated the S&P500 to previous highs, but we are now back to 1998 levels, and the consumer is tapped out as far as new credit goes, and is still paying off the mortgage and/or Heloc.

    The banks are running low on depositors,even tho the Fed loaned them money to meet reserve requirements.(Whats wrong with that picture?)
    Assets=liabilities, meaning the “money multiplier” needs deposits(or new capital for the cap structure) AND bank lending to “create money”. But this DOESN’T mean banks have a printing press, thankfully.

    Whats wrong with that picture?

    I’m glad you answered. Example #1
    “Chid:The bank has the $10,000 in their capital.”

    That would be a LOAN from the Fed. Not surprisingly Wall Street is anxious to get their bonuses quickly.

  • Posted by Twofish

    Assets = Liabilties + Equity

    Example #1: Why would I have bank stock? In any case, if the bank goes bankrupt, then it makes that the liabilities are more than the assets so the capital now belongs to someone else.

    Example #2: You have to remember that even in the previous crisis, where NASDAQ fell to 25% of its value, the overvalued internet stocks didn’t cause any rabbits to disappear. Total rabbits remain the same before and after a crisis.

    It caused a lot of phantom rabbits to disappear. The danger in any banking crisis is that once banks start closing and businesses go under, then you start ending up with a lot less real wealth than you did before.

  • Posted by Twofish

    Cedric: That would be a LOAN from the Fed. Not surprisingly Wall Street is anxious to get their bonuses quickly.

    No. It was an equity investment of preferred stock and/or warrants. There is a big difference between a loan and an equity investment. If you have an insolvent company or banking system, then a loan is not going to help you, since a loan doesn’t provide any new capital.

    Assets = Liabilities + Equity

  • Posted by credulous_prole

    Banks are not low on depositors: they are witholding capital to get TARP money and suck up competitors.

    Paulson mugged the US to create uber banks.

  • Posted by Cedric Regula

    I guess for the General Theory of Banking we should correctly write the formula:

    Assets = Liabilties + Old Capital Structure + New Capital Structure.

    However that may work out.

    Next 2scaley:”It caused a lot of phantom rabbits to disappear”

    My rabbits where paid for with real savings from my real earnings. Nothing phantom about that in my checkbook. And if our stock portfolios do show a gain for some period of time, since when do we call “return on investment” “phantom” ???? Not a great sales pitch for Wall Street, I don’t imagine.

  • Posted by Cedric Regula

    2fish:

    Latest posts crossed.

    “No. It was an equity investment of preferred stock and/or warrants. There is a big difference between a loan and an equity investment. If you have an insolvent company or banking system, then a loan is not going
    to help you, since a loan doesn’t provide any new capital.”

    Yes and no. I was only referring to Chid’s example where he referred the FED LOANS. TARP is TREASURY EQUITY.

    So this should cover all the places it’s coming from.

    Assets = Liabilties + Old Capital Structure + New Capital Structure.

  • Posted by Twofish

    Chid: 1) Bank of England show huge losses in various securities such as investment grade corporate bonds and ABS-CDOs, etc. None of the securities listed in the ‘losses’ are a simple ‘home loan’.

    No. Page 15 involve hidden losses that are right now off balance sheet that are likely to make their way on balance sheets. Basically banks have promised that if a corporate loan goes bad, that they will make up the difference. Right now that isn’t being counted. As things progress they will be.

    And those losses are just the tip of a major iceberg.

    Regula: My rabbits where paid for with real savings from my real earnings. Nothing phantom about that in my checkbook.

    Yes there is. Where did your employer get its money? Where did they get their money? Where did they get their money? Ultimately, there is a house that is worth nowhere near as people said they where.

    Also your checkbook is just bunch of numbers. You put it in a bank, the bank lends to someone that lends it to someone that lends it to something that does something stupid with it. Poof. The money is gone.

  • Posted by Cedric Regula

    c_p

    “Banks are not low on depositors:”

    I was referring to the 15 or so bank failures so far and FDIC takeovers, the disappearing IBs,the remaining 2 IBs changing to commercial banks so they can attract savings and checking account depositors to replace their other sources of capital, AIG etc..

    We are being mugged, but they are saying it’s for our own good. Still not sure if uber banks are better or worse than we have now. Under the past and current regulatory environment, it probably wouldn’t matter. We just start creating the next crisis again.

  • Posted by ops

    “since a loan doesn’t provide any new capital.”

    bingo.

    what would ?
    debt 2 equity, no?

    but no, we got a one %.

  • Posted by Cedric Regula

    2fish:

    “Yes there is. Where did your employer get its money? Where did they get their money? Where did they get their money? Ultimately, there is a house that is worth nowhere near as people said they where.”

    Everyone knows money comes from the government. I guess we could eliminate some confusion and try modeling this in the barter system. But the danger is people work to eat, and fish are a barter item.

    “Also your checkbook is just bunch of numbers. You put it in a bank, the bank lends to someone that lends it to someone that lends it to something that does something stupid with it. Poof. The money is gone.”

    Now we are getting somewhere. Works for stocks, bonds, housing prices, CDOs and CDSs(but NOT at notational value we hope) too.

    Poof it’s gone. There goes early retirement.

  • Posted by Chidambaram

    Cedric:
    Whats wrong with that picture?
    Absolutely nothing

    1) Assets = Liabilities and
    2) Assets = Liabilities + Owner’s Equity
    are both exactly the same equation.
    In some texts 1) is written because Owner’s Equity is also defined as a ‘Liability ‘ which is from the Corporation as a Legal Entity to the investor.
    Cedric I don’t know how sensitive this point might be but when you buy a stock for $200 and it falls to say $100; you sell the stock and you had a loss of $100.
    One man’s equity loss is another’s gain.
    Clueless reporters mention things like ‘the market crashed 7% eroding xyz gazillions in ‘investor wealth’.
    A crashing equity market only means that there’s an overall movement from equity to debt instruments (debt here includes deposits with banks).
    If you assume a simple world where people only have stocks, bonds and checking accounts:
    Stocks + Bonds + Checking Accounts = Constant K
    Note that this reasoning applies only in this assumed simple world. As you complicate things with more and more financial instruments, you will still get
    Total Equity + Total Debt = Constant K
    Note that Equity has a risk + return profile which comes directly from variability of business returns.
    Debt has a risk + return profile which comes from credit risk; and in the ultimate analysis credit risk is simply another form in which the risk of business returns is expressed, apart from the issue of simple trust.
    Financial engineering provides the ability to create various risk + return profiles beginning from your simple world of stocks, bonds and checking accounts.
    So you can have instruments which start with credit risk in a debt instrument and create an ‘equity rated’ instrument which has a higher risk + return profile.
    Similarly you can start with a lower risk + return profile stock and create an equity option which has a much different risk + return profile than the stock.
    In terms of flows, you can create instruments which provide an initial cash inflow, while exposing you to theoretically unlimited outflows, such as for example short positions in call options.
    No matter how much you alter the risk + return profile of instruments, your original equation
    Total Equity + Total Debt = Constant K
    Still holds.
    Coming to the point of some instruments which are ‘off balance sheet’ you’re just saying that from the perspective of one entity those assets are off their balance sheet but those instruments are still reflected in another balance sheet somewhere else.

  • Posted by bsetser

    umm — maybe a bit more discussion of SWF investment strategies that i see in recent comments would be a bit more appropriate given the topic of the post.

    I don’t generally mind off topic discussions in a civil tone late in a thread, but i don’t want to crowd out on topic discussion either.

  • Posted by Cedric Regula

    Chid:

    I’ll save myself the trouble of investigating all the financial hiding places out there, getting an accurate value on them, then summing them all up to prove that we lost rabbits from 2007 to present, and that there is no humongous hiding place that all the mature rabbits safely hide. But the government can certainly increase the bunny supply, or borrow from eternity in order to get their hands on the remaining scared Lagomorpha.

    But that causes problems with deciding how to distribute the furry little guys.

  • Posted by MMcC

    CIC has, since late spring (as far as I can tell) employed one of the global banks as a portfolio implementation advisor. That advisor’s advice, since day one, has been: “leave it all in cash.” I think it’s perfectly reasonable to suggest that CIC’s original plan – to acquire sub-10% passive stakes in various global companies when the price was right – became unsustainable pretty quickly. Indeed, one could argue with some conviction that it became unsustainable before they stopped following it… Since then, however, they appear to have sought out good advice and listened to it. Personally, I don’t think CIC will now put money into markets until clear evidence of a bottom is in the rear-view mirror.

  • Posted by Twofish

    Cedric Regula Says: Everyone knows money comes from the government.

    And everyone is wrong. Money is created by banks. The process by which banks create money is a very fascinating process.

    MMcC Says: CIC has, since late spring (as far as I can tell) employed one of the global banks as a portfolio implementation advisor. That advisor’s advice, since day one, has been: “leave it all in cash.”

    My newspaper sources indicate a different story which is that Morgan Stanley was in the process of setting up asset allocation.

    http://www.china.org.cn/business/news/2008-07/01/content_15916897.htm

    http://www.china.org.cn/business/highlights/2008-07/09/content_15982581.htm

    MMcC Says: Personally, I don’t think CIC will now put money into markets until clear evidence of a bottom is in the rear-view mirror.

    Personally, after so many high profile missteps, I think that CIC is going to be put on an extremely short leash. Also with all of the market turmoil whatever asset allocation plans they had are now dead.

  • Posted by Rachel

    Couldn’t one source of the CIC’s ‘stable returns’ also reflect its stakes in the Chinese state banks? Despite the fact their profit growth is slowing and their shares have been suffering, the CIC may still be receiving dividend payments from the state banks as Li Liming suggested some months ago. They likely continue to be the CIC’s best performing assets.

    http://www.eeo.com.cn/ens/finance_investment/2008/01/31/92109_1.html

    But the CIC’s delay in deploying capital clearly acted in its favor in terms of returns given the losses that many other swfs likely sustained. It probably helped Russia too, meaning it now has the funds to backstop the banking sector debt.

  • Posted by Rien Huizer

    Unless you are paid to invest according to rules like pension fund managers have, you would have been in cash etc a long time ago. I guess the Chinese State Council wanted a conservative approach with room for politically expedient investments. Nothing that would conform to silly investment management gospel. More like what hedge fund managers do with their own money..

  • Posted by killfish

    Twofish…you are an idiot. Your manner of thinking it too distorted for me to even attempt to talk sense or debate with you. Your logic is representative the last breath of a dying empire. Best of luck…you will certainly need it.

  • Posted by RebelEconomist

    Brad,

    If you are still watching this thread (not many of the comments are worth reading), I would be interested to know what you mean by “cash”. My understanding of cash is that it comprises currency plus demand deposits (and maybe repo) at a commercial or central bank. Where would the CIC keep that much cash? If it is on deposit at commercial banks, then, although such an investment might not get marked down, it is not without risk in the present environment. Or do you mean a wider definition of cash, including short term investments like treasury bills?

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