Why China Won't Come to the Rescue

Crabtownboy · Sep 20, 2008

If "once burned, twice shy" isn't an old Chinese proverb, it probably should be. As Gao Xiqing, the chief investment officer of China's $200 billion sovereign wealth fund, meets in New York City this week with Morgan Stanley CEO John Mack to discuss increasing the Chinese government's stake in the venerable — and flailing — investment bank, he bears an obvious burden. Last December, the CIC (the China Investment Corp.) invested $5 billion for a 9.9% stake in Morgan Stanley (for which the bank must pay CIC a 9% annual dividend until 2010). On paper, that investment is now down more than 25%. Worse, Beijing paid $3 billion for a piece of the Blackstone Group just ahead of the private-equity firm's initial public offering last June — an investment that occurred about a nanosecond before the so-called subprime crisis began annihilating value on Wall Street and beyond. Fairly or not, the Blackstone stake has since become the symbol in China of a naive bunch of foreigners getting hooped by Wall Street sharpies. It's been the subject of withering public scorn in China and has drawn pointed private criticism from the highest levels of the Communist Party, banking sources in Beijing and Hong Kong have said. The message: Never again. All of which makes CIC's critics in China wonder why Gao, a soft-spoken graduate of Duke University's law school (class of '86), bothered to get on the plane.

The answer, if the recent behavior of other sovereign wealth funds and foreign private equity houses is any indication, may be to deliver, in person, a simple message: No. Not again. Not unless you structure a deal in such a way that we simply cannot lose. Otherwise, goodbye. That, in effect, is what Sameer Al Ansari, the CEO of Dubai International Capital, told Wall Street earlier this summer. He had had discussions "with all the people you'd expect" in the pantheon of U.S. finance regarding a possible investment from his fund, he told TIME. Wisely, it turns out, he told all of them no — and then set out on a tour of China to look at direct investments in companies that produce something other than toxic collateralized debt obligations. "There are a lot of other compelling places to look for investments these days," he said.

The decision a couple of months ago not to invest looks pretty smart today, and it's not clear, despite this week's carnage on Wall Street, that anything has changed significantly. To the extent that sovereign wealth funds are talking to desperate-for-capital bankers in the U.S. — and, as Gao's trip shows, they are talking — the terms of the discussions, one senior Hong Kong–based banker said today, are likely to be very harsh for any potential recipient of capital: "You're basically looking at structuring a deal at this point in which there is no downside — none. Even if a company goes under, like Lehman, you're first in line to get paid a return on your assets. Take it or leave it."

That's more or less the deal secured by Temasek, a sovereign wealth fund in Singapore, when it invested in Merrill Lynch. It dumped $4.4 billion into Merrill last December at $48 per share, but a downside protection clause meant the firm would make money even if the stock plunged to $24. It did — and then some. By late last week, Merrill traded at just over $17 a share, increasing the pressure on CEO John Thain to do a deal. Over the weekend, he sold the firm to Bank of America in an all-stock transaction worth about $29 per share for Merrill shareholders — which means Temasek could walk away with about a 20% return should it sell it shares. The Temasek deal last December, banking sources say, taught everyone in the region a lesson: If you're talking to Wall Street, drive as hard a bargain as you possibly can — or walk. They need you much more than you need them.

Now, moreover, even if valuations in the U.S. financial sector get more appealing should the market rout intensify, there's another factor in play: governments in East Asia and the Gulf want their funds to help domestic companies, not foreigners. On Thursday, for example, Beijing's CIC announced it would make investments in three of China's biggest commercial banks — Industrial and Commercial Bank of China, Bank of China and China Construction Bank — that themselves are getting hurt by an economic slowdown and a real estate slump at home. "This is a significant policy initiative aimed at supporting China's leading financial institutions at a time of global turmoil," says Jing Ulrich, chairman of China securities at JPMorgan in Hong Kong. It's another way of saying to CIC's Gao Xiqing, If you come home from New York having increased our stake in Morgan Stanley, it had better be the sweetest deal anyone in Beijing has ever seen.
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http://www.time.com/time/business/article/0,8599,1842754,00.html

targus · Sep 20, 2008

Too much to bother to read without knowing what your point is.

Revmitchell · Sep 20, 2008

Since it is from time you can make an educated guess and say that the article is about "America bad"!

just-want-peace · Sep 20, 2008

Revmitchell said:

Since it is from time you can make an educated guess and say that the article is about "America bad"!
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And, for CTB to have posted it, doubles (triples--??) that possibility!:laugh:

Revmitchell · Sep 20, 2008

just-want-peace said:

And, for CTB to have posted it, doubles (triples--??) that possibility!:laugh:
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No doubt:thumbs:

abcgrad94 · Sep 20, 2008

I don't need or want help from China anyway. The Chinese government can't even treat it's own people right. Heaven help us if the US ever became indebted to them and under their power. ((shiver))

billwald · Sep 20, 2008

Fanny and Freddie bail out mostly went to Red China.

abcgrad94 · Sep 20, 2008

billwald said:

Fanny and Freddie bail out mostly went to Red China.
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Why am I not surprised?. . .:BangHead:

Bro. Curtis · Sep 20, 2008

China's one-child policy will take them out of the world's stage, soon.

LadyEagle · Sep 20, 2008

not in our life time.

Crabtownboy · Sep 21, 2008

abcgrad94 said:

Heaven help us if the US ever became indebted to them and under their power. ((shiver))
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The US is in debt to China, big time. We owe them billions upon billions. It is China that has lent us much of the money Bush has needed to conduct the war in Iraq. This puts the US in a very bad position.

The Chinese sell a lot of merchandise in the United States and, in the process, accumulate a lot of dollars. They then loan many of those dollars back to the United States in exchange for all manner of American i.o.u.'s, including Treasury bonds, federal agency bonds, and private-sector debt.

America's indebtedness to China, as a result, is staggeringly high, although the Bush administration - which needs foreign loans to help finance the budget deficit - seems unfazed. But there is reason for pause. The Wall Street Journal reported this week that China's holdings of foreign currency and securities would soon top $1 trillion, a fivefold increase since 2000. Roughly 70 percent of that is believed to be in dollars or dollar-based assets.

Of course, $1 trillion does not confer significantly more clout than, say, $990 billion. But the size and growth of China's holdings mean increasing vulnerability for the United States.

For several years, China's loans have helped to keep prices and interest rates low in the United States, and to finance big tax cuts. If the lending began to dry up - because Chinese officials decided to diversify into other currencies or to spend more at home - prices, interest rates and taxes in the United States would very likely rise.

If the loans dried up quickly - a worst-case scenario - the result could be a sharp financial crisis. A gradual shift could mean a long downward trend in American living standards as a higher cost of living took its toll.
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