Credit Crunch: China to the Rescue?

By Jill Treanor, Comment Is Free. Posted December 22, 2007.

The idea of China rushing to the rescue of the capitalist world seems so unlikely as to be unbelievable.

Except that it is happening. The China Investment Corporation - a newly-formed fund which helps control £100bn of China's foreign exchange reserves - yesterday ploughed $5bn into Morgan Stanley, the Wall Street firm. It has also taken stakes in US private equity firm Blackstone - owner in the UK of Cafe Rouge restaurants, Madame Tussauds and Center Parcs. Closer to home, the Chinese Development Bank, controlled by the Chinese state, owns 3% of Barclays.

The Chinese involvement in Wall Street is even more surprising given the protectionist stance of the Americans towards their own businesses until recently. When Dubai Ports World took over strategically important US ports last year, it caused a political furore. It was not enough to stop the deal, but it did require the bidder to sell off the US ports.

Until recently, it has been more common for Wall Street firms to take stakes in Chinese banks, in a search for exposure to the fast-growing economy and the burgeoning wealth of the Chinese population.

How times change, though. The involvement of the Chinese and other so-called sovereign wealth funds in US banks could well prove to be critical to their survival in the short term. Wall Street is suffering a painful hangover from the excesses of easy credit. The subprime mortgage crisis is causing huge dents in the financial sector's profits. The size of the problem is awesome. One bad bet by a group of traders caused Morgan Stanley to drop $8bn, and left the bank with a $3.6bn loss in the fourth quarter of the year.

Such holes are difficult to fill; hence Morgan Stanley welcomed the $5bn in cash from CIC with open arms. In return, it is handing over an estimated 9.9% stake to the Chinese investor. The deal comes hot the heels of the move by Citigroup to sell a £3.5bn stake to the Abu Dhabi Investment Authority, and a step by Bear Stearns also to take investments off the Chinese from Citic Securities, another state-owned investment fund.

These are unlikely to be the last investments in a big US business, given that China has the world's biggest foreign exchange reserves, worth $1.3trillion and growing by $1m a minute. And neither should it be. When shares trade freely on stock markets, anyone is allowed to buy them - whatever their politics and whatever their nationality.

While its economy continues to remain unscathed by the current credit crisis, the Chinese may well take the chance to flash their cash and extend their influence. Wall Street may not like it, but it seems to be in no position to shut it out.

See more stories tagged with: china, subprime, debt crisis

Jill Treanor is deputy City editor for the Guardian.

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