China Law Blog

1. People familiar with Asian business should know that paying a high price for something brings alot of "face", especially when others know you paid a high price because you can afford it.

2. I am still laughing at the "executive talent" in the US, EU and UK that thought that China would start using its cash reserves (whose size and value should continue to be questioned after the fall of AIG and Bear Stearns as well as the continuing plummet of stock markets world wide) to promote mass consumption by its population of foreign products.

China has shown its hand in its recent public scolding of Paulson (and Paulson deserves much scolding...where has all of that distributed bailout money gone? Are banks buying major positions in companies on the stock market? Is that why we had a week of rising indices despite no good news?).

China is trying to "order" the US to protect the investments of the Chinese gov't and major Chinese investors. But by doing this, Beijing is showing its desperation, it needs to protect its forex reserves and investments so that the money can be used to quickly build a social safety net to diffuse wide spread social unrest and the another fall of another Chinese dynasty.

China is going to use its wealth to protect itself. Not to shore up foolish speculators and worthless "corporate talent" which all got us into this deeper and deeper mess.

This is one of those few times where I empathize with the Chinese goverment's stance wholeheartedly. First, China has no obligation to "save the world" (read: saving Western bankers' behinds). Second, no one should be surprised that the Chinese government intends to use the $1.9 trillion it has collected over the last twenty years to do anything but protect Chinese economic and social interests during these rough economic times (that's what savings are for, aren't they?). As the article notes, China's factories are threatened by the loss of orders from Western retailers and that almost certainly means there is potential for great social and political upheaval. While it may be in China's interest to invest in some Western banks or other entities to free up credit or buy good stocks that are undervalued, it's understandable that with the new welter of regulations from the US government - both those already issued and those anticipated after President-elect Obama enters office - any wise investor would forego heavy investment in US-based investment banks or financial institutions until it has a better grasp of the regulatory and other risks it is facing (remember all the hoopla over CNOOC's failed bid to buy Unocal?). China might be better off investing in neighhboring states' economies to create closer economic ties as well as to build up a diversified portfolio. I should add that many of the Western politicans, economists and business leaders pleading for Chinese investment money often sound quite arrogant these days. I've actually read some comments in the NY Times, Washington Post, Wall Street and other newspapers to the effect that China "owes" a debt to the West for all the foreign direct investment that has been sunk into China. Given that all those Western investors made these investments with the express purpose of good returns on investment (and in some cases achieved their goals), I find such arguments self-serving, pathetic and silly.

Come on, it's been what, 8 months max since they got the SWF going? The losses were probably quid pro quo. Gao Xiqing is back in the news you'll see:

http://tinyurl.com/5gmapp

I am very confused by this post... CEB is criticizing China for being cautious with its fund when investing in toxic and non-transparent companies... I would say that Gao Xiqing is being very intelligent here. Perhaps China's experience in reforming the banking sector here and the NPLs makes them cautious of wading into firms like Citi where no one knows if it will end up like AIG>

If every seems to think we are now in a once in 100 year financial maelstrom, it has been 80 years since the Depression. The typical investment strategies and cycles can be thrown out the door for normal recessions. It will take the US years not months to get out of this. And because China's leadership is being cautious, I remain cautiously optimistic on the economy here.

I should add, did the author of this post pour his whole savings into American stocks because they are so low right now? Is he personally willing to risk everything on that? Absurd.

"China Is One Lousy Investor..."

...which puts them in the same category as everyone else who didn't sell at the market's peak last year.

Anyway, I think it's too early to call their strategy "buy high, sell low". They haven't sold yet.

China actually is showing itself as one smart investor with regard to the recent financial crisis. Weeks ago, a lot of attention focused on when China would step into the market, and they didn't.

The reason was simple.

No one, even Paulson himself, thought we were at the bottom and buying in before the bottom would only be a foolish move.

Valuations are off 20-30% since China was being called out for not proping up the world economy, and Beijing is looking smart right now.

When the bottom is reached, the money will enter. We are just not at the bottom yet.

R

I am not sure losing couple hundreds of millions out of a 200 billion fund through the, once-a-century financial tsunami, constitute CIC as "lousy investor". Furthermore, CIC is not a hedge fund, it has to operate more like a pension fund that has a certain balance of risk/return.

Bottomline, CIC might not be Warren Baffet but it is doing OK.

Honestly, anyone who hasn't lost much money is already a winner.

@ Falen

China's SWF does not use the entire estimated cash reserves. I think the SWF is in the 20 billion USD range. Also, China's currency reserves are not all in cash as we found out when Bear Sterns and AIG went down, it seems quite a bit of it is in corporate bonds, maybe gov't bonds as well.

Governments in general are lousy investors. It would be better for them to return the money to their citizens and let them invest it.

But I have to admit it is amusing watching the mandarins from Tsinghua and Beida fall flat on their faces. The real s**t will hit the fan when all that USD-denominated debt that China holds is inflated away to pennies on the dollar in real terms. Then the question becomes where does the anger of the Chinese people get directed: at the mandarins who pissed away the money or at the foreigners who scammed them out of it.

Actually CIC has been a great investor, and it's returns have just blown away everybody else.

The reason is that they've stayed mostly in cash and treasuries, and so they are 3 percent, when everyone else is down 30%.

Also, I don't think that CIC is (or should be) thinking in terms of timing but rather in terms of buying good companies. One problem with foreign purchases is that if it is a good company at cheap prices, chances are that someone local will get the deal, and if you are offered a purchase, you really have to ask why.