[This special guest columnist is a long-time colleague of mine writing under the pen name Dee Prince. He is a Nigerian-born international petroleum consultant who works out of offices in Beijing, Lagos, Toronto and London. He is an Associate Professor of China’s leading post-graduate School of Business and Economics, and his current professional focus is on Chinese energy requirements and strategies, and how these impact Africa, Europe and Russia in particular. Read his previous articles on this blog here, here, and here. – Robert Amsterdam] CHINA, MORGAN STANLEY AND INTRIGUING CAPITAL FLOWS By Dee Prince You couldn’t make it up if you tried. My last class in the just-concluded Corporate Training course on Banking Risk and Basel II Accord for Chinese Banking examiners fell on the same day that Morgan Stanley announced its China-related mega-deal. You know the one I’m referring to – China’s China Investment Corporation – which is sometimes cutely referred to as the nation’s “Sovereign Wealth Fund – and its $5 billion capital injection into Wall Street’s venerable institution and also the second largest US investment bank.
There was an understandable buzz in the class that day. You see, China has been more successful making strategic investments in the US Banking industry than it has been in the Oil and Gas sector.Remember CNOOC and Unocal?In the little-understood inter-sector competitive world of Chinese business, the Banking industry regulators feel they have achieved a one-up on their Oil and Gas counterparts. As one of my students, a relatively senior Banking regulator, told me:“It’s all very well to pick up stakes in oilfield assets in Kazakhstan, Iran or Nigeria, but what’s that compared to owning a chunk of one of the very best banking brands in the USA?”The acquisition of a significant ownership in this blue-blooded institution comes on the heels of the groundbreaking Blackstone investment earlier this year.(By the way, the Blackstone investment is looking somewhat sickly given Blackstone’s share price drop since then. However, many industry watchers believe that this proves that CIC was not looking so much at a high-return stake, but more at the chance to take a fast ride up the global Private Equity learning curve AND to get an inside track on future international – for that, read “western” – acquisition opportunities.)For an interesting discourse on what China and Russia in particular may be looking to achieve with their rapidly mounting dollar reserves, take a look at this.Also, some of the hubristic comments about China and its stated plans for global financial investments make for entertaining reading.The Morgan Stanley deal has not come without raising all kinds of concerns in the global financial industry. For many, there is a feeling that the US investment bank is going to have a palpably unfair advantage in securing more lucrative underwriting and securities issuance business than its US and European competitors in the ultra-high potential Chinese market.In some quarters, the angst revolves around the timing of the announcement (coinciding with the second mammoth write-down of Morgan Stanley’s moribund sub-prime mortgage related investment portfolio). There has been some suggestion that the sheer suddenness and speed of the deal must have meant either privileged access to information on the part of CIC, or something even more sinister.These comments are at odds, naturally, with the Chinese viewpoint. My students reflect the prevailing (perhaps quasi-official) slant on this deal. There is a feeling of barely disguised glee that the whole transaction was to China’s advantage, both economically, but more importantly, geo-politically.The country’s official news agency’s comments reflect the prevailing mood of a burgeoning Chinese presence in global finance.Little is reported in these parts of the crucial waiver of Board seats by CIC. Instead, reporting emphasis is placed on the limited downside potential of the structure of the investment, a viewpoint with which I agree. After all, the deal sets a limited price for the future mandatory conversion of equity units into common shares, at a time when Morgan Stanley shares were trading at a depressingly low trajectory.It would be churlish for anyone to deny that the deal structure is very much to the advantage of CIC. Let’s remember that the prevailing industry mood is that Morgan Stanley, under John Mack, is doing a fairly good job of cleaning out its sub-prime mortgage stables, and the bank’s medium-to-long term share price potential is fairly rosy. All this of course is in the absence of any future, violent damage arising out of the ill-conceived MBO and other mortgage-related securitization orgies.What is very significant is that even in places like India, with that country’s well known fear and envy of China’s growing economic might, the attitude is one of admiration for what the CIC investment in Morgan Stanley means. Politically influential publications are calling for the Indian government to move quickly to emulate the CIC and its nascent forays into high stakes global financial dealmaking. More astonishingly, they urge that the management of future comparable Indian investment vehicles be given as much autonomy and investment discretion as possible.Then, of course, we shouldn’t forget the Singapore Temasek Holdings cash injection into Merrill Lynch, which, almost bizarrely, happened at about the same time that CIC was bargain buying into Morgan Stanley. The significance of this particular deal is that many of my students refer to Singapore as “our little brother in Asia”.When I ask them what “little brother” means, I am greeted by a sea of enigmatic and inscrutable smiles.Believe me, these two investment transactions may just be a precursor to future China and other Asian-region pickups of prime US banking shares.But having said all this, there is another side to the coin which this writer analyzed most intriguingly in his recent piece.Much of this analysis makes a lot of sense, on the surface. However, comparisons with the US experience in the 1930’s, and with Japan in the 1990’s may not be quite meaningful.The Chinese Communist Party is nothing if not a tigerish survivor. The science fiction-like combination of “free market” economics with a ruthlessly authoritarian political leadership is unique. There are more than two options that China can adopt to attempt to deal with a possible, if not probable, domestic banking crash. I talk to many of my Banking examiner students about bad loans in the Chinese banking system, and I continue to be astounded by their unshakable confidence that the problem will be dealt with in due course.Perhaps it’s a case of putting up a brave face to a “foreign devil”. More likely they know a lot more about the solution options that may be adopted than I could ever expect to.Whatever the case, for now, China is utterly determined to become a major, major player in global finance. When industry watchers sneer at this ambition, they are likely to get a riposte similar to that of my students:“These western bankers flying into Beijing and Shanghai looking for our money. If they were so smart, how come they got into this pathetic sub-prime mess?”Hard to argue with that.