from Follow the Money

First Blackstone, then Barclays …

July 23, 2007

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The alliance between the Chinese state – lest we forget, still a (nominally) communist state -- and the high priests of global financial capitalism is close to complete.   

Goldman, Royal Bank of Scotland and Bank of America all have invested in China’s big state banks, effectively partnering up with China’s government.   And China’s government is now an equity investor in Blackstone and – with a bit of Blackstone help – looks to be taking a stake in an (expanded) Barclays as well.  Technically, the investment in Blackstone came from the new investment company while the cash for Barclay's is coming from China Development Bank, but, well both ultimately have the same owner.   I presume some part of China's government will soon buy an equity stake in a major hedge fund or investment bank as well.   Why not go for the trifecta .. 

Commercial banks used to be robbed, according to the famous quip, because that was where the money was.  Now the money is in the hands of China's government.   And China seems willing to deploy it far more aggressively than in the past.  The formation of the state investment company seems to signaled a decision to go straight from bonds to strategic stakes, without bothering to fiddle with small, liquid holdings in a range of companies.   Any one looking for financing to do a really big deal will, I would guess, soon make a pilgrimage to Beijing.

Dr. Dooley, Dr. Garber and Dr. Folkerts-Landau have long argued that China needs to hold liquid foreign exchange reserves -- think US Treasuries -- as collateral against foreign investment in China.  But China's state no longer seems all that interested in swapping Chines equity for low-yielding debt denominated in a depreciating currency.  Western banks investment in China’s large  state banks should be offset by equally large Chinese investment in large western financial institutions.  Rather than swapping equity for debt, China's government wants to swap equity for equity. 

The ironies abound.  

The British state’s retreat from the “commanding” heights of the British economy seems increasingly to be offset by ascent of other states, whether the Chinese state or a set of active Gulf states.   The point here is more general:  Asian and Middle Eastern governments – through their investment funds -- increasingly are playing a role in Western economies that voters do not necessarily think their own governments should play.

China's investment in Barclays is coming from a lender theoretically devoted to "development"  -- both domestic infrastructure lending and subsidized lending to Africa.  I guess there is more poverty in the City than I thought.   Either that or China Development Bank is now more commercial than China's state commercial banks.

A few years back, it was often argued that China's state would inevitably need to retreat from its commanding position in China's own banking system.  China would need to turn the keys to its banks over to US and European banks if it wanted to develop.   Now it seems like China's government is poised to get the keys -- OK, not quite; China Development Bank's stake in Barclays falls well short of control -- to another countries banking system well before it relinquishes control over China's banking system. 

And it increasingly seems like the highest stage of Chinese communism will turn out to be financial capitalism.   I am not quite sure that anyone would have guessed back in 1949 that China’s communist government would be invited into Wall Street and City board rooms – or, for that matter, that China's communists would ever have accepted. 

Then again, it was rather hard to imagine even a few years ago that China’s communist government would insist that the most important expression of Chinese sovereignty is its continued ability to mobilize -- through the central bank and other state-owned financial institutions -- China’s savings to subsidize Wall Street and the City, along with US and European consumers.  China lends -- and I assume invests -- on terms that almost guarantee losses for China (see Chan Akya).    

I also personally find it ironic that many of the strongest advocates of free markets vigorously defend an exchange rate regime whose necessary consequence is a growing government presence in financial markets, and see far more worried by the prospect that US pressure might prompt China to change than by the prospect that China's government might continue to add to its external portfolio.   

China’s exchange rate peg means that China's state will accumulate $500b in external assets this year – and unless something changes, even more next year.  China's citizens have made it clear that they don't want to hold assets denominated in a depreciating currency.   That means China's money-losing external investment (barring extraordinary returns that offset dollar, euro and pound depreciation against the RMB) will be done by the China's government. And China's government -- like many others -- has made it clear that it no longer just wants to buy bonds.    Not if it can buy banks.

I suspect that the growing relationship between China’s state and major financial firms won’t do much to address popular concerns about the turn that globalization has taken.   Workers in industries that compete with industries that have located some of their production in China certainly don’t think China’s government is on their side.  Some big financial firms do (literally).   China's emergence has put downward pressure on the wages of many, but clearly helps to increase the salaries (or perhaps capital gains) of those who get a cut of very large deals .... 

Unlike some, I don’t think globalization necessarily implied emerging economies would use their central bank balance sheet to subsidize the financial sectors of the US and Europe.    Rather, I think the current form of globalization stems directly from a set of policy choices – choices that may end up making China’s government a big player in many markets, not just the bond and currency market.

Update: Tony Jackson of the FT's take on Barclays/ CDF.  He seems rather more concerned -- at least by the prospect of an outright Chinese (or Russian) government takeover of a large UK bank -- than Felix Salmon.    

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