China Buys Wall Street
Donald Straszheim, 12.27.07, 06:00 AM EST
Every U.S. broker wants China Investment Company as partner.
Is Wall Street chasing China's stock market?
The subprime mortgage problem has now yielded a full-blown credit squeeze on Wall Street with securities firms' stock prices at fire-sale levels. The new fire-sale buyers are the so-called sovereign wealth funds, and China's are the most prominent.
With the world's largest trade surplus, China is accumulating foreign exchange reserves of about $1 billion per day. Rather than holding these reserves in low-paying Treasury securities, China recently created a new sovereign wealth fund--China Investment Company (CIC)--to invest these funds more profitably. Market participants, pay attention.
The West worries about whether these sovereign wealth fund investors will act like conventional rate-of-return focused investors or will have a different agenda in mind. Two points: First, if the sovereign wealth fund investors are rate-of-return motivated, they might have a much longer time horizon than the typical short-term-focused U.S. institutional investor. I am an optimist on this--increasingly disgusted during my many years in the investment world at the ever shorter term focus on stock prices. To me, anything that extends investors' time horizons would be positive, allowing companies to plan and act for the long run.
But second, if the sovereign wealth fund's agenda even borders on the geo-political, or may set up a sequence of events that is uncomfortable to the host country, then such funds' investments are going to be rejected in many parts of the world. China says it wants " ... to be treated as a common investor in financial markets and will follow international practice regarding disclosure." Fine. But China is a non-market economy that is dominated by the state sector. It is understandable that foreign governments are guarded, given that explicitly stated policy in Beijing is to develop centrally owned state enterprises into positions of global dominance. It is hard for many to accept that CIC would have a less-expansive or less-strategic view......
China Goes to Wall Street
BEIJING/HONG KONG: Morgan Stanley chief executive James Gorman wasn't going to miss his chance. It didn't matter that he was on holiday. Gorman dropped everything and flew to Beijing last April. He wanted to show up in person to make sure his firm got a piece of what was shaping up to be the biggest initial public offering in history.
In Beijing, Gorman spent hours rehearsing with his team for a half-hour pitch to executives of Agricultural Bank of China, whose IPO would eventually raise $22 billion.
"For a half-hour bake-off, he came all that way," Wei Christianson, Morgan Stanley's China CEO, said in an interview last month from her office near Financial Street in Beijing....
Economists at Goldman Sachs believe that mainland China's market capitalization will rise to $41 trillion by 2030 from $5 trillion now. That would make China's stock market the biggest in the world. U.S. market cap is expected to grow to $34 trillion from $14 trillion over that time.
But with China, American financial powerhouses may have met their match. Here, government connections and family ties can trump decades of banking experience and western swagger. So for all their efforts -- and kowtowing -- this is likely to remain one tough market Wall Street firms....
In Beijing, where the towering gray headquarters of the world's largest banks -- Industrial and Commercial Bank of China, China Construction Bank and Bank of China -- cast a long shadow, Wall Street banks are still on the outside looking in.
The towers in and around Financial Street wouldn't look out of place on Wall Street. But looks can be deceiving.
"You can't just come in here and act like this is New York and try to operate the same way you would in New York," said Philip Partnow, who heads China M&A for UBS.
Global banks trying to jumpstart their China operations are tangled in a web of strict regulation, culture clashes and politics. They worry too that even the sweat equity they are putting into training their partners in the ways of western banking will be lost. Some wonder whether China's long-term plan includes their foreign guests from Wall Street.
"At some point, the Chinese want to get to the point where they don't need the foreign investment banks," said Michael Werner, a Hong Kong-based China banking analyst with Sanford C. Bernstein.
DO FINANCING BIASES MATTER FOR THE CHINESE ECONOMY?
Summary: Chinese companies and government-sponsored investment vehicles are increasingly purchasing U.S. assets. For all the concerns about Chinas large holdings of U.S. Treasury bills, its investments in American companies could be met with even greater sensitivity.
It is widely acknowledged that Chinas financial system is deeply troubled. Its banks have very high nonperforming loan ratios and its stock market has lost 50 percent of its value since 2001 amidst a GDP growth rate averaging some 9 percent a year. Those facts about the accounting aspects of Chinas financial system are becoming better known in the West. However, what has not been sufficiently high- lighted is the precise effect of Chinas dysfunctional financial system and its broader pattern of allocating resourcesin favor of the state sector at the expense of the private sectoron the Chinese economy and society.
Probably the only reason economists and business analysts have found it hard to reconcile the accounting aspects of Chinas financial system with the performance aspects of the Chinese economy is that Chinas GDP growth has been so impressive. Some experts (e.g., Rawski 2001,Young 2003) have argued that Chinas economic perfor- mance has not been as impressive as the official statistics indicate. Their work in this area delves into rather specialized and arcane areas of Chinese methods of compiling and reporting data. While this work is analytically important and does resolve some of the puzzles of Chinas rapid growth, it is very technical and difficult for nonspecial- ists to understand. Thus, it is unlikely to grab readers attention away from newspaper headlines touting the rise of China and the huge trade surpluses that country has accumulated.
Many Western observers believe that China today is a dynamic market economy. I agree that China has a large foreign sector that is completely market oriented, and in many downstream industries do- mestic entrepreneurship is vibrant and is growing very fast. But the fundamental orientation of the Chinese state has not been supportive of private ownership of assets and private provisions of goods and services.
The fact is that as of 2003, less than 2 percent of the short-term bank credits went to domestic private firms. In 2003, 40 percent of fixed asset investments occurred in the explicit state sector and an- other 33 percent occurred in a sector of other ownership of which state-controlled shareholding firms comprised the vast majority. Only 14 percent occurred in the explicitly private sector. Is 14 percent large or small? I do not know; all I know is that the private sector already accounted for some 20 percent of fixed asset investments as early as 1980.
In 1998, Nicholas Lardy published an excellent book on Chinas problematic banks. He entitled the book Chinas Unfinished Eco- nomic Revolution to convey the idea that the financial sector is the last frontier of Chinese reforms. But finance pervades every aspect of an economy, and, as impressive as the development of Chinas product market has been, it is undeniable that its factor marketsforcapital and landare still tightly controlled by the state. Maybe it is time to write a book with the following title: Has Chinas Economic Revolution Begun?