China: A clueless chase to nowhere in particular
When, a few decades into the future, we cast our minds back to the early years of the 21st century, how will China shape up in historical perspective? Moreover, how are we likely to view the country’s leaders in these fulcrum years: Hu Jintao and Wen Jiabao, president and premier from 2003 to 2013?
Will these men be feted for the shrewd way they invested the country’s wealth, or ridiculed for frittering away the republic’s one chance of financial glory? Specifically did the People’s Republic manage the people’s money as well as it should have?
Up to now, watching China invest its cash has been a bit like seeing the Keystone Kops at work. In the silent-era movies they starred in, well-meaning public servants dash around in a bashed-up vehicle, legs and arms flailing.
Beijing’s slapdash approach to managing its money has been at least the equal of those sepia-tinted policemen, who graced our screens around a century ago.
This issue matters. China runs a huge trade surplus and its foreign currency reserves, fast closing in on the $3 trillion mark, make up about a third of the global total. Every month the country’s state-owned enterprises add to the stockpile, conveying billions of freshly minted dollar earnings to the altar of the politburo, like minions kowtowing to the emperor.
The emperor – played collectively in the 21st-century version of the film by 25 dour mandarins with an average age of 63 – toys with this largesse, sprinkling a few table crumbs into the hands of the most deserving of state institutions.
Some of the bigger crumbs get recycled straight back into the very markets where the banquet was first earned. China continues to plough its hard-earned dollars back into US treasuries, where they earn rather stodgy yields of between 2.5% and 3%, well below the Chinese inflation rate.
Every so often Beijing hectors the US for allowing the value of the greenback to soften, crimping the value of China’s treasury holdings – the US usually shrugs and looks the other way. But that doesn’t stymie China’s binge buying of US sovereign debt. China’s official holdings of T-bills hit $1.16 trillion in January, a yearly jump of 30%, according to the US Treasury.
More cash crumbs fall into the hands of China’s sovereign wealth funds. Beijing owns three of these plodding institutions, each boasting an equally plodding name.
China Investment Corporation diverts billions of the country’s dollars into foreign equities, debt, and alternative investments. Safe Investment channels yet more billions into a mixed bag of global blue-chip stocks. And the National Social Security Fund tiptoes around its own backyard, seeking respectable returns from Chinese fixed income and equities.
All three funds have had their highs and lows but none more so than CIC which, despite posting respectable returns in the past two years, has still managed to do some really rank deals, especially its investments in Morgan Stanley and Blackstone.
Yet more of the people’s money has been pumped into a dizzying cornucopia of foreign assets. China is busy snapping up natural resources from Peru to Papua New Guinea just to keep its economic braziers glowing. These deals are fully logical: loss leaders or the price paid for a booming economy.
But far too many of the country’s more prominent acquisitions have gone far too south. CIC, Safe Investment, resources firm Chinalco, China Development Bank, state lender ICBC: all have made big-ticket investments in listed foreign companies in recent years, and each of those investments remains underwater.
Indeed one could, if feeling in a particularly uncharitable mood, view this as China’s curse. The nation has all this cash, yet barely a single collective clue about what to do with it.
China needs to get a clue, and fast. Beijing won’t always run a large trade surplus. Its state-run banks are managed in a slipshod manner, their storerooms again bulging with non-performing loans. And it is a nation that is fast growing old without becoming nearly rich enough.
Looking back a few decades from now, the rather sad likelihood is that this generation of Chinese leaders will be viewed as a group of worthy but greying mandarins who had not the first inkling about how to invest the people’s money. Most likely, history will not be kind. We will remember them as we recall the Keystone Kops: a desperate bunch of panicky public servants in identical suits, their legs and arms flailing wildly as their charabanc veers off a cliff. It’s not a pretty sight.