The China Not-Investing Corporation
This isn’t exactly news to those who have been following the TIC data, but it is amusing. Reuters reports:
” Zhang Hongli, executive vice president of the China Investment Corp (CIC), said the $200 billion fund would be prudent in making decisions and slow the pace of its asset investments as global financial markets remained turbulent and the world economy fell into recession. “From September of last year, CIC already adjusted its investment plans for the start of this year,” Zhang said according to the Caijing magazine Web site, which cited a report by the official Xinhua news agency. “Now, cash is king and we will try as far as possible not to make investments,” he was reported as saying.”
Emphasis added.
Back when sovereign funds were hot, China often seemed to have two rival sovereign funds: the CIC and SAFE. Not that sovereign funds are passe, China seems to have two rival reserve managers: the CIC and SAFE.
It kind of makes me wonder if the CIC was really willing to dramatically increase its stake in Morgan Stanley last fall — or if it had the State Council’s approval to do so. To be clear — I have absolutely zero knowledge of what really went on then. But the gap between “cash” and 49% of Morgan Stanley is rather large.
Word that China plans to stay in cash though doesn’t seem to have filtered down to China’s state owned mining companies. Or perhaps to bankers looking to do deals in the mining sector. Chinese SOEs used to strenuously deny any hint that they might get preferred access to China’s foreign currency reserves. Now many seem keen to highlight that they have access to cash when others do not. MacNamara reports:
Mining executives say that with no need to answer to shareholders, many state-backed companies can take a long-term view on the country’s demand for metals. Although industrial activity is slowing sharply in China, the government will step up spending on infrastructure as part of a fiscal stimulus package.
In addition, Chinese state-backed companies have more access to cash than their rivals in other countries. “China has large foreign exchange reserves, and therefore Chinese companies which are government-backed have access to funds they can apply to assets outside China,” said Debbie Thomas, head of metals and mining at Deloitte.
A whole lot of firms globally now rely on the government for access to funds; Chinese firms no longer stand out.
One more subtle sign the world has changed. Anderlini and Tucker report in today’s FT that China wasn’t all that interested in getting access to Western financial technology after all. China’s government let foreign banks take stakes in China’s state banks more to increase their IPO valuations than out of a desire to have the state banks emulate the US and European bank practices.
“The foreign banks promised little and have delivered even less [to their Chinese partners],” according to one person who was deeply involved in negotiations between foreign investors and Chinese banks. “But the Chinese side didn’t really know what to ask for and were more focused on getting deals done as a precursor to very lucrative IPOs.” At least four other people involved in foreign investments in Chinese banks have said that, although there was interest at one level of the government in introducing western management practices and risk controls, the foreign investors were mainly brought in to provide window dressing for initial public offerings.
With names such as Goldman Sachs, Bank of America and RBS on their share registers, Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Bank of Communications that were technically bankrupt a few years earlier were able to achieve higher valuations when selling shares in Hong Kong and Shanghai.
This might include a bit of revisionist history: the optics of learning risk management from say RBS aren’t great right now. But it is rather striking that few feel the need to maintain the charade that the Western banks were brought in to improve risk management at China’s banks.
Bank of America, incidentally, may have wanted to take some of the profits from its investment in China Construction to raise a bit of capital, but was dissuaded by Chinese government pressure. China wasn’t worried that it would lose access to Bank of America’s expertise. But it did worry that the sale might pull China’s stock market down. The FT:
Bank of America last month cancelled a plan to sell more than $3bn worth of its shares in CCB after being told by senior government and banking officials that Beijing was unhappy with the timing of the sale, according to people familiar with the matter.
Some things, I guess, haven’t changed. Firms that want to do (big) business in China still want to remain in the good graces of China’s government.
CIC is the ultimate contrary indicator.
sell the dollar, buy risk assets. see you in a year when they are clamoring to buy gold.
You can have multiple reasons for doing things. At the senior level one reason that Western banks were brought in was that having an outside Western bank vouch that everything was kosher was considered a very good thing.
quote: With names such as Goldman Sachs, Bank of America and RBS on their share registers, Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Bank of Communications that were technically bankrupt a few years earlier were able to achieve higher valuations when selling shares in Hong Kong and Shanghai.
Absolutely, and this doesn’t conflict with the desire to improve transparency and risk management. The logic was that if you have a Western bank overseeing a Chinese one, that the Chinese bank would get a higher IPO price since investors could be confidence that the books weren’t cooked and the bank was under the oversight of people that presumably knew what they were doing.
The people that wanted better oversight over the banks included the State Council and the Communist Party. Without an outsider on the board, then you just have people promoted from the ranks running the banks, and they had both the will and the ability to prevent the State Council from having adequate supervision.
This all bears repeating since the assumptions that people make regarding how things do and should work have so dramatically changed, that a lot of this makes no sense. I expect to be telling my kids in disbelief that at one point in history, lots of people believed that the only goal of corporate management was considered to be to maximize share price, and that anything that increased share price was automatically a good thing.
bsetser: Some things, I guess, haven’t changed. Firms that want to do (big) business in China still want to remain in the good graces of China’s government.
And firms that want to do big business in the United States have to remain in the good graces of the US government. The obstacles that Beijing has placed on Western banks in China is nothing like the obstacles that the US has placed on Chinese banks in the United States.
The reason that US banks got as favorable treatment as they did was because Chinese banks really wanted to emulate the US financial system.
bsetser: It kind of makes me wonder if the CIC was really willing to dramatically increase its stake in Morgan Stanley last fall.
I’m pretty sure that CIC and Morgan Stanley both wanted to do a deal. I’m also sure that both the US and Chinese governments vetoed it.
bsetser: Word that China plans to stay in cash though doesn’t seem to have filtered down to China’s state owned mining companies.
CIC plans to stay in cash. The mining companies have different plans. If the mining companies have enough cash to do a deal, they can ignore CIC. If the mining companies need the banks to give them foreign exchange, they may run into a problem.
The Chinese government is this seething cauldron of turf wars and bureaucratic infighting. It’s actually a good thing since it gives you some of the benefits of market competition and multi-party democracy. Right now all the people who said “stay in cash” are saying “ha! ha! I was right. You lose. I win.” If things had gone differently, you’d have a different group of people end up on top.
bsetser: “China has large foreign exchange reserves, and therefore Chinese companies which are government-backed have access to funds they can apply to assets outside China,” said Debbie Thomas, head of metals and mining at Deloitte.
First question:
So what is Debbie Thomas trying to sell you? And what are the Chinese mining companies trying to sell Debbie Thomas?
congratulations to china on having cash, – and congratulations on not investing in icelandic banks, the irish stock market, going to jupiter, shorting treasuries, leaving it all to madoff and co., making campaign contributions, or invading the middle east.
congratulations to china on maintaining a relationship between their own fiat paper and the dollar which suits their agenda, not anyone else’s.
twofish says : “The reality of a market economy is that real production, real work, and real jobs are created by the exchange of bits of paper.” congratulations to china on seeing that it is therefore advisable to keep a store of these bits of paper.
so congratulations to china on either good luck or good timing, to be holding such a store of paper just as leveraging yields to deleveraging, inflation to deflation, expansion to the great contraction.
Happy New Year to all. Best wishes.
Now back to business. Market is filled with talks of USTs being overbought and a possible USD weakness down the road.
Buiter’s article on FT seemed to be suggesting so. Think its a good piece there.
http://blogs.ft.com/maverecon/2009/01/can-the-us-economy-afford-a-keynesian-stimulus/#more-395
CIC’s cash position is no more a contrarian indicator than my own. It just means some of us were paying attention to blogs like Follow The Money, print like the FT and the Economist, etc back in May 2007 when the first open rumblings of trouble could be heard. Unlike Chuck Prince, I stopped dancing, and so, it seems, did the CIC, albeit somewhat later.
So now everyone who can afford to is sitting upon a pile of cash, twiddling their thumbs while this mess sorts itself out.
Re: China’s quiet “no” to BoA’s attempt to sell Chinese assets in order to to raise capital. There’s an old American saying I first heard from Molly Ivins: “You’ve got to dance with what brung ya’.” I guess those two are still dancing, although China gets to call the tune this time.
[...] Contradiction… The China Investment Corporation is, well, not investing. [...]
CIC bought shares in Blackstone and Morgan. If i put billions in those two firms I’d probably also say “never again” to U.S. financial firms. Be interesting to see if CIC keeps it words should Mr. Dimon fly over this summer through a meeting set up by Geithner….Wouldn’t rule out CIC taking a minority control in JPM (which in my opinion will need to raise capital sooner than most expect).
Fortunately the Chinese have not been burned on their T-bills…yet!
Maybe a bit off topic, but this crisis really allows and paves the way for China to emerge as a global player that will demand it’s share on the coin.
There’s a war between Israel-Gaza (Israels offensive highly condemned by the Council of Europe and UN) mean-while Bush has no response and Obama is sunbathing in Hawaii it truly shows once again the world has a calling for a new order. What I’m curious has how big of an influence China will demand as it has emerged onto the global financial scene as a major player.
@adiemuso: first I don’t agree with much Buiter writes. In Brad’s article I distinguish the ever present element that steers most of our economic life: power and relationships.
Second, I would never base my investment/trader decisions on economic articles, quite on the contrary. Though views of economists can be immensely interesting to learn how the financial world functions (like this blog here), they’re dangerous for investment purposes because they give you the illusion of a viable long term view without a timing.
And I put my wallet where my mouth is: long $ and short gold (short term outlook). Whether the buck will go down or up depends on the relative value of the economies, and I suspect that exporting countries will ultimately suffer more than importing countries (a medium term view = months). In the latter I even include long term developments like demographics (coincidentally exporting countries have aging – and saving – populations: Japan, Germany, Italy and even China as a consequence of its one child policy)
…………
And what can China do with its excess dollar reserves (on a large scale)?
- invest in the US government (treasuries and agencies)
- exchange for other currencies (directly suicidal for its $ holdings)
- invest in foreign assets of non-USD countries (indirectly suicidal for its $ holdings)
- all that is left is to acquire US assets, but imposible on a large scale for the US is the most protected economy in the world
[...] The China Not-Investing Corporation [...]
David Hale:
“Foreign central banks could play an important role in the US government bond market because they already own about half of the existing debt stock. China recently displaced Japan to become the largest holder of US government securities because of its long-standing policy of intervening to manage its exchange rate against the US dollar policy. As a result of the downturn in its economy, China has recently begun to lose foreign exchange reserves and may not need to intervene in the market again to restrain the renminbi. Japan, by contrast, has been experiencing significant upward pressure against the yen despite the severe downturn in its exports and output growth. Japan has not intervened since 2003 but, if the yen rallies another 5 per cent, the country could be forced to spend large sums restraining its currency. If it does, Japan could provide $200bn-$300bn of funding for the US deficit during 2009 while Chinese demand for US securities fades.”
After the cold war was pronounced over and the world was being divy’d up China and the US made a deal. We give you shipping, you give us insurance. Follow that line of thought and tell us who got the best deal.
China is at a disadvantage vis-a-vis the U.S. because they are centrally planned and even with our huge government, we are not. At least not yet.
Anticipation: Wouldn’t rule out CIC taking a minority control in JPM (which in my opinion will need to raise capital sooner than most expect).
I would rule it out.
The US government will not let CIC or any Chinese firm take any management position in a US bank. It would never pass CFIUS review which means that the maximum that any Chinese company can hope to have is 9.99% and no management stake.
Without management influence or even a seat on the board, there is no point in investment.
Twofish: The obstacles that Beijing has placed on Western banks in China is nothing like the obstacles that the US has placed on Chinese banks in the United States.
DJC: Absolutely correct. The Federal Reserve has only permitted two Chinese state owned banks to operate in the United States. The Bank of China operates a small retail banking operation in both New York and San Francisco ethnic enclaves. More recently last year, China Construction Bank was granted a only a commercial license to operate an import-export business financing operation in the United States.
It is almost laughable that the Western banking analysts on CNBC always criticize the state-owned Chinese banks as uncompetitive compared to Wall Street banks. At least the Chinese state-owned banks didn’t get caught with their pants down unlike their American banking counterparts laden with trillions of dollars in subprime garbage. Now the US Treasury is a significant equity partner in Citicorp owning a large portion of shares: just like socialist Chinese government owning shares of Bank of China.
Djc — i take your point that the ownership structure of US banks and Chinese banks has converged and that the “competitiveness” of US banks may not be quite as high as was often argued. But I would hazard to guess that both US and CHinese banks have made their share of bad bets. The bad bets we know about, but in China I suspect:
a) SAFE has some exposure to US corp bonds that have generated losses, and the Chinese state banks have been selling off their foreign portfolio b/c of questions about its performance.
b) the domestic Chinese banks may have a new round of bad loans from the current slump. Nothing much goes bad when the economy is growing as fast as China’s was.
This isn’t a defense of the US banks/ the US system or an argument that China should emulate the US. Only an observation that there a few doubts about the health of China’s banks too.
[...] The China Not-Investing Corporation Brad Setser [...]
Predictions, hmmmm…here’s one:
With additional capital injections from Warren Buffett and from Chinese mainland sources, BYD acquires Chrysler’s assets and starts to build electric cars targeting Western united states.
Simultaneous, a solar panel builder and a battery installer are acquired by an obscured mainland company and start a massive campaign to promote solar-powered electricity in the Western states.
It would later be revealed that the same mainland holding company had injected cash into all three companies.
Observer: It would later be revealed that the same mainland holding company had injected cash into all three companies.
That part can’t happen. There are reporting requirements involved with Exon-Florio so there is no way that a Chinese company could quietly this sort of investment.
This isn’t to say that these investments won’t happen, it’s just they they can’t happen quietly. It also means that there isn’t any particular reason for China to hide its investments, and lots of reasons for it not to.
US disclosure laws interact in curious ways with Chinese business practices. In a lot of cases, we know a lot about the internals of Chinese companies because of US and Hong Kong disclosure laws.
One other thing is that under Exon-Florio, the President can disapprove of any foreign purchase which he things is not in the national security interests of the United States. I suspect that we are about to find some very expansive and creative definitions of “national security.”
Geert,
good to find someone here who puts his $ down.
i agree with you on having independent trading/investment actions/ideas from economic articles/reviews/comments/ideals.
in my opinion, though seemingly, the real world operates differently from its theoretical counterpart, however the academic/theoretical model forms a basis for a trader/investor to consider his/her strategies for the long/medium/short term.
i have never agreed with anyone who prides his/herself with their profits through short term/ intraday bets entirely devoid of any economics/politics/real worl analysis. I think anyone can do that, and a winning streak or profits are just pure luck. a seasoned gambler at Las Vegas can be equally good too. No disrespect to anyone.
back to the contents of this blog, i do think that there are avenues for the USD assets being held by the Chinese to be used without being self suicidal. Brad has pointed out a few, logically i think thats very likely too.
Money flows are one of the important factors for Traders/Investors. Especially one of this magnitude.
Twofish: I suspect that we are about to find some very expansive and creative definitions of “national security.”
That’s true. However, I think we are about to find that the business of America is business, and cash is king. Even politicians would be hard pressed to find reasons for keeping autoworkers out of a job when someone is willing to rescue them.
bsetser: Bank of America last month cancelled a plan to sell more than $3bn worth of its shares in CCB after being told by senior government and banking officials that Beijing was unhappy with the timing of the sale, according to people familiar with the matter.
FYI, the sale just went through. Bank of America made about a $1 billion on the sale.
[...] $70 billion. And the CIC is now bragging that its external portfolio was mostly in cash – as it didn’t invest most of the $90 billion or so of foreign exchange that it bought off SAFE (I am setting aside the [...]