from Follow the Money

The best investments China never made ….

March 16, 2008

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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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CITIC -- according to Felix -- never closed on its investment in Bear. If I was a bit more skilled with blog formatting, I guess I should scratch Bear and write JP Morgan. Talk of a spectacular collapse. And if I had to guess, I would bet that Chinese financial institutions are going to be a bit more reluctant to invest in large US banks and broker dealers going forward.

CITIC isn’t the only institution happy not to have made a set of big investment -- or at least not closed -- over the past several months.

The China Investment Corporation (CIC) hasn’t been in any rush to place large sums in US and European markets. It has spent an extended period of time selecting its external fund managers. But, at least to my knowledge, it hasn’t actually awarded a set of large mandates yet. It may already have picked a few hedge funds to manage its money though ...

Certainly the CIC didn’t buy a bunch of foreign exchange from the PBoC in January. If it had, China’s reserves wouldn’t have gone up by as much. The large Ministry of Finance bond issue was held in RMB at least through the end of January, and perhaps longer.

It actually may not be in the CIC’s interest to put its money to work quickly. By holding on to its RMB, the CIC kept its assets in an appreciating currency. And it avoids taking market risk.


I probably need to qualify my last statement. The RMB has been appreciating against the dollar, but not -- at least over a short horizon -- against the euro (or even, over past few weeks, the yen). The CIC could consequently have gained by trading RMB for euros, or any other currency that has benefited from the dollar’s sharp recent slide. But I rather suspect that the last thing the Europeans want right now is a huge surge in Chinese government demand for their currency.

Clearly, the CIC hasn’t avoided all market risk. The market value of its investment in Blackstone has fallen significantly; Morgan Stanley isn’t down as much, but it is still down. But the CIC did avoid dumping a bunch of money into a host of equity markets in December only to see their value fall this year.

There is a broader point here as well. While the past several months are unique, the CIC is perhaps the only investment company in the world that might well be able to do better financially if it didn’t invest any of the funds that were raised for it to invest.

Of course, if the Ministry of Finance just held on to the RMB, there wouldn’t be much need for a CIC. At least not in its current form. Most of the CIC’s assets are domestic -- as it received equity in domestic financial institutions in exchange for the foreign exchange used in their recapitalization. But a part of the CIC was also supposed to manage an external portfolio ...

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