from Follow the Money

6% of Bear Stearns a day

October 24, 2007

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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6% of Bear Stearns a day.  That is basically what the US has to sell to China to finance its current account deficit right now.  


Not 6% of Bear ($1 billion) every business day.  6% of Bear every single day of the year.  Financing the deficit requires selling more like 10% of Bear ($1.5 to $2b) every business day.


We don’t really have good data on the true scale of China’s foreign asset accumulation in q3 (China hasn’t indicated how much money it shifted to the CIC/ how much money Chinese firms took out of the country), but a reasonable estimate for China Inc’s total foreign asset accumulation in 2007 would be about $500b.   If old trends hold, about 70% of that goes into dollar assets – a bit more actually, as China has to offset the impact of the euro’s rise if it wants to keep the dollar’s share of its portfolio constant.   That works out to around $350b a year.   


Or to put it a bit differently, China, Inc bought about 6% of Bear (with the option for a bit more) and 10% of Blackstone and still has about $346b left over to buy other US assets -- as well as plenty of additional funds to invest in Europe.

Actually, the Bear-CITIC deal is structured as a swap, so there is no net flow.  PrefBlog argues that Bear provided CITIC with vendor financing it needed to buy a stake in Bear, but it could equally be said that CITIC provided Bear the vendor financing needed to buy a stake in CITIC.    CITIC and China have lots of spare cash; Bear and the US not so much.


I already have noted – back when the China Development Bank bought a significant share in Barclays’ – the irony in China Inc's close ties with the the uber-capitalists in the Street and the City.   CITIC is, after all, a true red chip, founded by a party princeling.    Wall Street goes where the money is.   Right now, it is in the hands of the state capitalists.

CITIC's stake in Bear, though, does put China's various complaints about hedge funds in a new light.   China, Inc now owns a rather large prime broker, and thus potentially stands to profit from more, and more aggressive, hedge funds.    

Perhaps even more interesting is what this deal suggests about China’s changing attitude toward foreign investment.   It used to be the case that financial firms looking for access to China needed to put money in China.   Jon Anderson of UBS has noted that Chinas never has been all that open to foreign purchases existing Chinese assets, only to new greenfield investment that added to China’s capital stock. 

China thought did initially welcomed strategic investments in China’s big state commercial banks.   But China now seems to think (not incorrectly) that it gave the foreign investors a bit too good a deal.  Goldman and Bank of America are sitting on huge gains for supplying China with funds that in aggregate it doesn’t need – and perhaps bundled together with some of the financial expertise that China wants. 

Now though the terms seem to be changing.   Getting access to China’s market may no longer require putting money in China.  It may instead requires accepting investment from China.     

I suspect China regrets not asking for a stake in Goldman in return for Goldman’s stake in ICBC, and a stake in Bank of America in exchange for Bank of America’s stake in China Construction. By linking investment in China to accepting investment from China, China can leverage the desire of many firms to get a toehold in China to gain political support in the US and Europe for China’s own desire to invest more of its own funds in higher-yielding assets abroad.    

It is part and parcel of “reverse globalization.”    China doesn’t particularly need Wall Street’s money.  Wall Street, on the other hand, increasingly wants a cut of China’s money.

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