China sees opportunity in US recession
By Antoaneta Bezlova
BEIJING - 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. "But now that China
has acquired a 10% 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 US$5 billion 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 US political
backrooms.
The investment in Morgan Stanley is the latest in a series of prominent
deal-making abroad the country's new $200 billion 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 sizeable sum of money will be channeled 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 at present control between $2 trillion and $3 trillion; experts predict
that their assets will swell to more than $10 trillion within a decade.
Fears that such assets will be used to take over key domestic industries in the
US 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 on 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 last 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 US 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 US housing market have forced top investment banks such as
Merrill Lynch and Citigroup Inc to look for help from overseas investors as far
afield as China, South 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 by the
state-owned China Development Bank last week, inviting speculation that Chinese
leaders have chosen to maintain a low profile for their investment targets.
Neither China Development Bank nor Citigroup has commented on the reasons
behind the last-minute rejection of a plan that had 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 finance
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 a 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, an economist 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 flotations 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, overall Chinese institutional and private
investments in 2008 may well exceed $250 billion, or nearly double the $134
billion China poured into overseas investment in 2006, said the Beijing Youth
Daily.
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