from Follow the Money

The China Not-Investing Corporation

January 5, 2009

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

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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.

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