The Banking and Strategy Initiative

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Moving China's governance models – Investments, Splits and higher FDI

Even as China’s Huijin invested more in September in China’s big four banks to bring them to add back their LGFV exposure (Local LSFs) to the balance sheet, FDI growth slowed to single digits and China also did some spring cleaning, appointing a new regulator Shang Fuling to the PBOC stewardship from his role at the head of  China Securities Regulatory commission.

As previously mentioned two of China’s retiring regulators were also replaced by bankers at ABC and BOC

SHANGHAI, CHINA - MAY 20:  Shang Fulin, chairm...

Image by Getty Images via @daylife

who moved to their new roles in supporting governance structures for China’s continuing dominance of “growth”

Large inward FDi to China of which less than 5% comes from the USA that added a monthly $9 bln in August September and October grew to $87 bln till September a much higher rate in the first half

Meanwhile, the Huijin entity which hangs on to CIC governance and control is finally deigned to split from CIC (China Investment Corporation) thus separating the domestic bank and financial services folio from CIC’s International investments (partly from their exchange surplus) china already has another State Pension Fund that invests globally and in Asia which will now become bigger in sheer size as the domestic investments would yet amount to 10% in each of the big Four and some in other Top 10 banks as well. The top private lender China Minsheng meanwhile maintains a higher growth on unbridled real estate investments on alower base, even as banks’ balance sheet strength seems to pooh-pooh the idea of a state-wide default crisis in China.

The international China fund would there after be adding Private Equity investments including a $1.5 bln in the Black Swan Fund for Nicholas Taleb. However with the Huijin separate that would not risk their existing China investments. Adding to that is another $1.5 bln in professional PE allocation as other Asian SWFs burnt their hands in the 2007 last-minute real estate scram  and the ensuing bank discount bonanza claimed a few more sovereign dollars

According to FT,

Lexington Partners, Goldman Sachs and Pantheon Ventures have each agreed to manage $500m for CIC through special accounts, which are to be kept separate from their main funds, according to people familiar with the agreements

China’s outbound FDI is still limited to extending Chinese trade hegemony and has been predominantly built around growing Yuan trade and in rich resource  sectors like Iron and Coal. China has been making concomitant infrastructure investments in Africa since 2005

Private Equity had expected to continue managing SWFs and Pension funds without control but with PE inflows dropping to a $245 bln , a 5 year low in 2011, SWFs have become larger investors with segregated funds  though unlikely to be in charge of the investing but pitting fund managers against fund manager for their money’s returns

Splitting the SWFs geographically shows that over 60% are based in emerging regions such as Middle East/Africa and Asia/Pacific. North America and Western Europe account for approximately 40% of relevant institutions. Breaking down SWFs in Private Equity Funds, Asia/Pacific dominates 31.6%, Middle East/Africa 30.3%, North America 19.7% and Western Europe 10.7%. SWFs make up 2% of the 2,935 LPs, of which other types of investors such as pension funds (19%), corporations (15%), and foundation/endowments (14%) are the largest constituents.(Ref: KDI)

Trading hegemony in Brazil and Chile as the Largest trading partners and the growing imports from China into the United States have already marginalised Latin American nations like Mexico, that depended on inter MERCOSUR trading links to grow All’s not well for China though as the regulation and control since 2009 has not resulted in significant growth in domestic consumption and the currency appreciation is already seen as peaking as it crimps growth with  domestic wages further higher and Power shortages affecting capacity and employment

Also from the FT, China is making infrastructure investments in developing Latin America which would also be welcomed by its newest leading partners in Brazil and Chile

China is in talks to build an alternative to the Panama Canal that would link Colombia’s Atlantic and Pacific coasts by rail – a move that Bogotá also hopes will spur Washington to push for Congressional approval of a US-Colombia free-trade pact.

Brazil continues to struggle with the anachronism of growth and slowdown in the same rush as slow growth dulled profits at Vale ( world’s largest Iron Ore producer ) by 18% from last year and property prices in major cities instead kept rising by 22-28%. Brazil is going ahead with rate cuts( third this week) from a high 12.5% to lower manageable levels Credit in Brazil has risen at a more than healthy 19.5% level from 2010 and mortgages increasing by 50% (45.3%)

Economy slowing faster than expected with inflation out of control ( out of comfort zone of the Brazilian Central Bank) Dilma Roussef’s problems could be compounding because of single-minded Chinese inflows even as it struggles to avoid the old Latin American disease of fiscal instability and restructuring with or without Brady bonds

Outward FDI from China was a high $90 bln in its first year in 2006 and is a not so small $39 bln in 2011



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