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China weighs Wall Street’s dangers and opportunities

China’s cash-rich financial institutions want to extend their influence overseas, but experts say the risks of investing in Wall Street giants have left them deeply wary of coming to the rescue.

Morgan Stanley, desperate for a white knight, is reportedly in talks to sell a 49 percent stake to China Investment Corp (CIC, 中國投資公司), a sovereign wealth fund.

At the same time, separate reports say the US investment bank is also in discussions with Beijing-controlled conglomerate CITIC (中國國際信託投資).

“Crisis is a good opportunity for buying cheap assets,” said Mei Xinyu (梅新育), a leading researcher at a Ministry of Commerce-backed think tank.

Morgan Stanley’s market value shrank to US$24.1 billion this week, he said, adding: “It’s cheap indeed.”

But he also cautioned China has much to consider before plunging in, from the real value of US institutions and the risk that Washington will restrict management and voting rights.

China has already been burned by investing in Wall Street. The US’ finance center was the CIC’s first shopping stop after it was established last year to invest part of China’s US$1.8 trillion in foreign reserves.

The stake they bought in private equity group Blackstone and a 9.9 percent holding in Morgan Stanley are now worth less than half what they paid — US$ 3 billion and US$5 billion respectively.

“The collapse of Lehman Brothers doesn’t mean the bottom of the market,” said Shen Hongpu, an analyst for Cinda Asset Management Corp (信達資產管理公司). “There’s still a couple of months to go and more trouble ahead.”

Sovereign funds, including CIC, justified their early Wall Street purchases as long-term investments, but after this week the argument may no longer hold.

“That view has now been overridden by fears that many companies may not last until the wider market rebounds — there is the perception that companies of any size may fail anytime in coming months,” Sherman Chan (陳穎嘉), a Sydney-based analyst for Moody’s, wrote in a research note.

The risk of investing in emerging Asian markets may now be no greater than the US or Europe, Chan wrote.

Analysts say Chinese institutions are being cautious and not hinting at how they will respond to the latest escalation in the crisis, which began more than a year ago with the US subprime housing crisis and resulting credit crunch.

Transactions by China’s emerging financial titans made public this week sent mixed signals.

The Bank of China (中國銀行) bought a one-fifth share in the Edmond de Rothschild Finance Company of France for 236 million euros (US$342 million), a spokesman for the French bank said late on Thursday.

The country’s largest insurer by premiums, China Life Insurance Co (中國人壽), said on Tuesday in a notice to the Hong Kong exchange that as of June it had reduced its holding in Visa Inc to 3 million shares, down from 6.8 million in March.

The latest turmoil has also highlighted one of China’s unique challenges: how to protect itself from being left with a growing mountain of foreign reserves — and investments — mostly denominated in depreciating dollars, said Shi Jianxun (石建勛), a professor at Shanghai’s Tongji University.

Another major hurdle in keeping Beijing from bailing out Wall Street, he said, is the government would face hard questions at home if it failed to first address China’s sagging markets and own struggling national champions.

This week Beijing took major steps to dismantle that obstacle by removing taxes on buying shares, increasing its stakes in three leading banks and introducing its first interest rate cut in six years.
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