China Sees Opportunity in US Recession
Chinese pundits continue to fret about the gloom and doom scenarios that an imminent United States economic recession might have in store for China's surging economy, but some are beginning to see a silver lining in it too.
"If it was not for the subprime mortgage crisis China could not have dreamed of pumping money into top Wall Street financial institutions," legal expert Zhu Yiwei wrote in an opinion piece in the Southern Weekend last week. "But now that China has acquired a 10 percent stake in Morgan Stanley, there is hope that, through building a network of personal connections on Wall Street, we can work to reduce trade frictions between the two countries."
Indeed China's infusion of five billion US dollars into the financial titan Morgan Stanley in December to help rebuild its capital base has been portrayed by some experts as a successful inroad into the Wall Street fortress that should be used by Beijing to acquire more power to influence opinions in U.S. political backrooms.
The investment in Morgan Stanley is the latest in a series of prominent deal-making abroad the country's new 200 billion US dollars sovereign wealth fund -- the China Investment Corporation (CIC) -- has completed since its inception in May. Both its creation and activities have created a buzz in global financial markets in anticipation that a sizable sum of money would be channelled into global assets.
But the fund has also raised political hackles in some countries for fear that its masters may exploit the openness of developed countries to international capital to seek strategic dominance of key resources and infrastructure and further their national foreign-policy objectives.
China's investment fund is only the latest newcomer among sovereign wealth institutions that have proliferated in recent years in countries that produce oil or have built up large currency reserves through surging exports. These funds control between 2 and 3 trillion US dollars currently, but experts predict that their assets would swell to more than 10 trillion dollars within a decade.
Fears that such assets would be used to take over key domestic industries in the U.S. and Europe have prompted officials from the Group of Seven leading nations to call for clear rules on sovereign wealth funds. The International Monetary Fund has also been called to help design codes of conduct for them.
In China the reaction to such fears has sometimes been unabashedly nationalistic.
"The excessive interest in China Investment Corp. is a reflection of the heating global competition between major world powers," said a recent editorial piece in the China Times.
"It is pointless for an investment firm from a country like China to attempt and hide its aspirations, pretending its goals are entirely market-driven. CIC is a sovereign wealth fund of a big power and should use the available market mechanisms to fulfill the country's strategic needs," the article went on. "Purchases of strategic foreign assets and much-needed natural resources should be on top of its agenda. "
Ironically, these opinions have appeared at a time when Chinese leaders are at pains to emphasize the political independence of the country's new investment vehicle.
"This investment company is entirely commercial," Premier Wen Jiabao said at a joint news conference with visiting British Prime Minister Gordon Brown on the weekend.
CIC's external activities "must not be politicized,'' Wen said, adding: "The government doesn't meddle."
Chinese policy-makers remember well the setback the country's third largest state-run oil company, the Chinese National Offshore Oil Corporation, encountered in the United States when it tried to acquire California's energy company Unocal in 2005. The political backlash that ensued showed the suspicions and hurdles awaiting other potential Chinese attempts to acquire large companies in major developed countries.
Nevertheless, the opportunities presented to investors by America's sinking financial fortunes have been difficult to resist. Big losses from bad loans tied to the battered U.S. housing market have forced top investment banks like Merrill Lynch and Citigroup Inc. to look for help from overseas investors as far afield as China, Korea, Singapore and Saudi Arabia.
After pumping money into Morgan Stanley in December, Beijing eventually decided to reject a proposed multibillion-dollar investment in Citigroup Inc. by the state-owned China Development Bank last week, inviting speculations that Chinese leaders have chosen to maintain a low profile for their investment targets. Neither China Development Bank nor Citigroup Inc. has commented on the reasons behind the last-minute rejection of a plan that has been in the works for weeks.
Some Chinese experts suggest the decision may have to do with Beijing's reluctance to clinch another high-risk deal at a time when public criticism that its previous investments in Blackstone Group LP and Barclays PLC have fared poorly is rife.
"We still haven't seen the end of the subprime crisis and this is perhaps not the best time to invest in Wall Street," says Ding Zhijie, professor of finances at the Beijing University of Foreign Trade and Economics. "The fear is that intense competition between Asian investors may push many to enter that market prematurely and pay high price for it."
Other experts argue that China should seize the opportunity and invest in resource-rich developing countries with fewer regulatory hurdles compared to the West.
"CIC should set its targets on emerging markets where there is a lack of capital and they are looking to attract strategic investors," says Zhang Ming, economic expert with the Chinese Academy of Social Sciences. "It is only a matter of time before protectionist sentiments arise there too."
All seem to agree that the establishment of the sovereign wealth fund marks only the beginning of a high time for Chinese investments overseas.
Under pressure to reduce China's gaping trade surplus and ease appreciation pressure on its currency, Beijing has relaxed many rules about overseas investments and Chinese companies and individuals have been spending big on acquiring assets and stocks abroad.
Flush with cash from recent floatation on the stock markets, Chinese commercial banks have been busily acquiring stakes in foreign banks to expand their international presence. Chinese companies for their part have been encouraged to look aggressively to purchase long-term supplies of energy resources and raw materials.
If the current trend continues, the overall Chinese institutional and private investments in 2008 may well exceed 250 billion dollars, or nearly double the 134 billion China poured in overseas investment in 2006, said the Beijing Youth Daily.