Friday, December 21, 2007

China takes a stake in Australian banks

This is how China is administering its massive US dollar foreign exchange reserves that its built up by exporting huge quantities of toxic toys and other things the American consumer addiction craves.

China's State Administration of Foreign Exchange ("SAFE") "has taken small stakes in Australian banks", according to a Dow Jones Newswires report by Lyndal McFarland.
Before proceeding, note that the Australian guvmint has for decades maintained a bit of a closed shop when it comes to the Australian banking industry under the so-called "Four Pillars" doctrine.

There are other players in the industry, both Australian and foreign, but the Large Lads of Australian banking are -- with their respective shares of the ASX/S&P200 share index -- NAB (National Australian Bank - 4.9%), CBA (Commonwealth Bank of Australia - 6.26%), ANZ (Australia New Zealand bank - 4.13%) and WBC (Westpack bank - 4.2%). So influential are these banks on the Australian stock indexes that these four companies account for nearly 20% of the entire index' value.

If you add BHP and Rio Tinto to the mix, you have about one-third of the value of the entire field, with the remaining 194 stocks making up the rest.) By simply limiting trading/dealings with those 6 stocks, any one could practically affect the valuation of the entire Australian stock exchange. Given that the Australian government mandates that employees pay into superannuation funds, and that most of those funds invest in the ASX index, a whole lot of battlers' savings swing in that wind.
Now, continuing with the DJ Newswires story, it was reported that,
"The stakes taken by the state-owned agency, run by Madam Hu Xiaolian, who is also deputy governor of the People's Bank of China, are considered [by whom?] portfolio rather than strategic investments."

A subsequent DJ Newswires "Market Talk" item notes that the stakes taken by SAFE are approximately one percent each of ANZ, CBA and NAB. Those 3 banks comprise about 15% of the entire ASX index. The Market Talk report says, "Chinese purchases would be a good sign for Australian banks as it would suggest that 'weight of money' is providing support..."

With Rupert Murdoch's Dow Jones media bringing us the bigger picture of Chinese investments in Australian banks, his Australian flagship operation (and isn't it nice to have choice of news sources?), The Australian, reported earlier today, ANZ has become the latest target:
ANZ chief executive Mike Smith, who is keen to step up the bank's ties with China, revealed this week that a major Chinese investor had taken a stake in the bank but would not release the name.

"China is sick of pissing away its foreign reserves on low-yielding US Treasuries," said one observer yesterday.

The financial sector is seen as a key target area. China Development Bank paid $US3billion for a 3.1 per cent stake in Barclays Bank in July, while the Industrial and Commercial Bank of China spent $US5.6 billion to buy 20 per cent of the Standard Bank Group of South Africa in October.

Morgan Stanley's new Chinese benefactor, CIC, was set up only months ago, given $US200 billion of its own to invest, with a mandate to do better than returns on US Treasuries.

Its first investment was a nightmare, swiftly losing millions on its $US3 billion investment in the listing of US private equity firm Blackstone.

But the Morgan Stanley deal shows that it has learnt the lessons of Wall Street very quickly, negotiating a tough deal for its cash injection, which will give it almost 10 per cent of the once powerful bastion of US capitalism.

The latest investment by CIC is the third bailout of its kind in a matter of weeks, following the $US7.5 billion investment by the Abu Dhabi Investment Authority in Citigroup under similar circumstances, while UBS last week announced it was getting an $US10 billion injection from the Government of Singapore Investment Corporation and an unnamed Middle Eastern investor.

This followed the $US1 billion deal by Wall Street's Bear Stearns - which was one of the first on the Street to be hit by the sub-prime mortgage crisis - with the Chinese Government-owned Citic Securities.

With Australian companies such as property group Centro caught by the closure of some international debt markets as a result of the sub-prime crisis, and banks such as St George and ANZ this week warning that their cost of funding is under pressure, it is worrying to think how much worse the fallout from the sub-prime crisis could have been if the sovereign wealth funds were not ready with their handy billions.

The deals have also been remarkably free from the xenophobic reaction seen over recent years against Chinese companies such as CNOOC wanting to buying into US companies. [And Mr. Murdoch would be well versed on the who's and how's of stirring up that xenophobic reaction. Guambat wonders why the oil deal created so much distress compared to the recent financial bail-outs? Is saving the skin of the Big Boys of Wall Street, perhaps, a factor?]

While no specific deal is on the horizon, the prospect of Canberra having to deal with attentions of the big Chinese investors in Australian companies next year is increasing. So far there has been none of the xenophobia in Australia about potential Chinese investments here that there has been in the US.

But this week's sabre-rattling by NSW unions opposing the sale of the state's electricity assets - claiming that Chinese investors who happened to be visiting the state were "kicking the tyres" of a NSW power station - shows that there is always the potential for those with vested interests to raise the issue.
In a related opinion piece in the same paper, John Durie said,
THE Chinese Government has brilliantly exploited the greed-inspired US sub-prime crisis to build a strong case against the predicted increase in protectionism against sovereign wealth funds. Indeed, in Australia a Chinese Government entity on one's share register is something some brag about.

This year is the first in recent history in which China has acquired more foreign portfolio assets ($US29.2 billion) than investments in China ($US21.5 billion).

This move will spark protectionist fears, but saving Wall Street helps.

The transfer of power from West to East was never more apparent than in deals like these, which appropriately enough came via Wall Street's penchant for blowing itself up through lax risk controls and outright greed.

[Newly elected] Australian Finance Minister Lindsay Tanner, a free market advocate who in years past has urged the scrapping of foreign investment controls, now says he is having second thoughts because of the political impact of, say, China bidding for BHP Billiton.

No matter where you stand, clearly the trend is real and getting bigger.



UPDATE: It now appears that SAFE is distancing itself from this story. The WSJ reported:
China's foreign exchange regulator Saturday denied it has invested in Australian banks, saying the news is inaccurate and could be confusing the regulator with other parties.

Wei Benhua, vice head of SAFE, said, "The rumor is inaccurate. We have investigated it," when asked by a reporter to comment on the news during a forum held in Beijing.

Asked by Dow Jones Newswires if SAFE has bought the stakes as a proxy for China's sovereign wealth fund, which was set up in September to manage US$200 billion worth of foreign exchange reserves, Wei declined to comment.

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