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Bargains await Cash Rich China

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Thursday, October 9, 2008

Washington Times

Bargains await cash-rich China

Chris O'Brien

BEIJING | When the world's economies bottom out, the most populous nation will be better poised than others to turn the financial implosion to its advantage, leading Chinese economists say.

China's financial institutions have been relatively unscathed by the meltdown. Laden with $1.8 trillion in foreign exchange reserves, they possess the spending power to splurge on bargain-price shares in the world´s crumbling banking and real estate giants.

A mood of caution appears to prevail, however, after two high-profile investments faltered last year.

The China Investment Corp. (CIC), a sovereign wealth fund set up a year ago with $200 billion in foreign exchange to invest, bought a $3 billion stake in Blackstone Group and $5 billion in Morgan Stanley, both of which are mired in the U.S. crisis.

The Chinese government's reluctance to wield its financial clout overseas would represent a missed opportunity to invest in some "grossly undervalued" companies, said Yao Shujie, an economics professor and head of the School of Contemporary Chinese Studies at Nottingham University in Britain.

"Investors are repressed by fear and a lack of confidence at the moment, and it is understandable individual investors don´t want to jeopardize their life savings. But China, as a country, has the ability to bear a large amount of risk. Now is the time to take risks," he said.

Mr. Yao is not advocating a wholesale purchase of Wall Street´s financial stocks. China lacks the experience and expertise to manage the likes of Goldman Sachs or Morgan Stanley, the remaining major investment banks.

Instead, he said, China should follow a strategy of "a billion dollars here, a billion dollars there," spreading risks over a diversified portfolio, and should consider board-level representation so Chinese bankers can learn new management techniques.

A week ago, Japanese banking giant Mitsubishi UFJ Financial completed a $9 billion deal to buy a 21 percent share in Morgan Stanley.

"If the Chinese government follows this kind of policy, then by the time this crisis is over, which in my view will be in one to two years, it could have made a huge profit from it," Mr. Yao said.

Shen Minggao, chief economist for the respected Chinese business magazine Caijingsaidhe thinks China will remain "cautious as people are still thinking that maybe the worst is yet to come."

At the same time, Mr. Shen said, the U.S. approval of a $700 billion bailout plan presents China with strong investment opportunities and serious bargaining power.

"The U.S. needs funds from foreign governments. ... China should demand premiums for this kind of investment as there are obvious risks attached," he said.

But China's own stock market is sinking along with other Asian exchanges. The key Shanghai Composite Index was down more than 5 percent Monday.

The stock market fell for the third consecutive day Wednesday, dropping 3.04 percent to end at 2,092.22 points. But the market is expected to rebound after the central bank cut interest rates for the second time in less than a month as the U.S. and Europe slashed their rates.

Chinese Internet sites show popular indignation at the Blackstone and Morgan Stanley investments. Many think China has enough to address without helping to correct American blunders, and some say the U.S. is getting what it deserves after lecturing China on its economic management.

People´s Daily, the official newspaper of the Communist Party, released a commentary that cited the contrast between the U.S. economic woes and the success of the Beijing Olympics as proof of the superiority of China´s political system.

"Its advantages are increasingly evident," it said. "Western countries are mired in low growth, and the United States´ recent severe financial crisis is a manifestation of the dead end of liberalism and the destruction of the myth of American institutions."

The laborious bureaucracy that often stifles Chinese policymaking could hinder investment overseas, said Nicholas Lardy, a senior fellow at the Washington-based Peterson Institute for International Economics.

"In the current environment, the need for capital in various Western financial institutions is so urgent that players have to move fast," he said. "China is not able to do so."

Whether China ultimately benefits from the financial crisis is likely to hinge on how it reacts to a weakening demand for the exports that have driven China´s economy in recent years, pushing annual growth rates to double digits.

Chinese Prime Minister Wen Jiabao said last weekend that the country´s financial system was "sound and safe" and expressed his "full confidence in China´s economic development and financial stability."

Analysts said long-term success depends on the government´s ability to transform its economy from a reliance on exports to an increase in domestic consumption - not easy among a population of devoted savers.

Aware that anxiety among the people tightens purse strings, the Chinese media have tempered their tone about the global implications of the financial crisis.

"China has relied on exports to support its growth more than most, so it is exposed to a global slowdown. It also has a very high level of investment relative to [gross domestic product], and there is a risk that investment in China could slow sharply," said Brad Setser, a fellow for geoeconomics at the Council on Foreign Relations in New York.

"Conversely, China has great capacity to use fiscal policy to support domestic demand as its fiscal position right now is strong, and it also has the option of taking its foot off the brakes and lifting current curbs on bank lending to support growth," he said. "China consequently has significant vulnerabilities, but it also has a lot of policy ammunition."

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