China Holds On To Its Purse Strings
STEVE INSKEEP, host:
Now there has been talk that some Asian countries, particularly China, might step in and buy stakes in failing U.S. financial institutions. That was the hope of some people anyway. China is the world's fastest-growing economy, and it has the world's largest foreign exchange reserves, which it's holding on to for now. NPR's Anthony Kuhn reports from Beijing.
ANTHONY KUHN: Last summer, Housing and Urban Development Secretary Alphonso Jackson was in Beijing cajoling China to buy more mortgage-backed securities from the Government National Mortgage Association, or Ginnie Mae, which is part of HUD. China's top four state-owned banks already have about $23 billion worth of Fannie Mae and Freddie Mac bonds. China's central bank Governor Zhou Xiaochuan asked Jackson, how risky are those bonds? Jackson replied, we see no problems with them. China is now estimated to hold over a hundred billion dollars in mortgage-backed securities, including bonds from Fannie, Freddie, and Ginnie. That's up from just $3 billion worth five years ago.
Dr. HOLGER MICHAELIS (Partner, Boston Consulting Group): Well, I think most of the people who have invested in mortgage-backed securities by now do feel some regret. So I wouldn't be surprised if China would also be a bit regretful about some of the investment decisions taken in the past.
KUHN: That's Holger Michaelis, a Beijing-based partner at the Boston Consulting Group which advises Chinese banks. China's purchases of Fannie Mae debt have drawn sharp criticism at home. Yi Xianrong is a senior economist at the Chinese Academy of Social Sciences, a government think tank here in Beijing. He says the Chinese government just didn't understand what it was buying.
Dr. YI XIANRONG (Senior Economist, Chinese Academy of Social Sciences): (Through Translator) At the time I criticized their investments. They were just using their little bit of investment experience to judge U.S. mortgage-backed securities. Back in January of 2007, I warned them these securities are very risky. You've got to keep a close watch on them.
KUHN: China's lack of experience in foreign financial markets has shown up elsewhere. The China Development Bank bought a three percent stake in the British bank Barclays last year, but it shares slumped by 50 percent not long after. China's state-owned investment fund, the China Investment Corporation, paid $5 billion for a stake in Morgan Stanley and sank $3 billion into the private equity firm Blackstone only to see their shares tank because of exposure to subprime loans.
Mr. LOUIS KUIJS (Senior Economist, World Bank, Beijing): Several of China's public institutions have been burned by buying shares or stakes in companies that have subsequently fallen. And that has received quite a bit of attention in the press.
KUHN: That's Louis Kuijs, a senior economist at the World Bank in Beijing.
Mr. KUIJS: That has meant that politicians and then the leaders of those institutions are being asked to be more careful.
KUHN: China still has a lot of reasons to buy stakes in U.S. financial institutions. China's government is sitting on $1.8 trillion in foreign exchange reserves, and they want to get higher returns on it than what U.S. Treasury bonds offer. China's banks meanwhile take in more in household savings money than they can lend out, and they don't want that money sitting idle. Another reason is that Wall Street firms would sell their assets cheaply now because they're desperate for cash. But Holger Michaelis says you can't buy assets just because they're cheap.
Dr. MICHAELIS: For the pure sake of financial returns, we would advise Chinese banks not to go for an acquisition overseas.
KUHN: Michaelis says that for now Chinese banks are likely to watch and wait, at least until the full extent of the current financial crisis becomes clear. Anthony Kuhn, NPR News, Beijing.