Chinese flexing economic muscle
NEW YORK – There’s a good reason schools across the country are scrambling to find people who can teach Chinese: It’s quickly becoming business’s second language as Wall Street seeks to tap China’s $1.3 trillion in foreign reserves.
China has been making increasingly aggressive investments in some of the world’s most prestigious financial companies in recent months – most of them American. Morgan Stanley, Bear Stearns, Blackstone Group, and Britain’s Barclays have all negotiated major stakes by Chinese government-controlled funds.
Investment banks ailing from the subprime mortgage mess are looking for money to shore up their balance sheets. And China is leading a surge of investments from Asia and the Middle East that so far have sunk about $25 billion into Wall Street banks.
That’s just the start of what some believe is a dramatic reversal of financial power in the shadow of Wall Street’s credit turmoil.
“Both Chinese private and government interests are controlling more and more of the U.S. economy, and this is a result of the big trade and budget deficits we have,” said Alan Donziger, professor of economics at Villanova School of Business. “These investments will make the U.S. somewhat less independent, but this is inevitable when we live in a global economy.”
To be sure, Wall Street’s current predicament is “our own doing,” he said. Turmoil in the credit markets have been fueled by defaults on subprime mortgages, and that’s led the Federal Reserve to attempt a bailout of the industry through interest rate cuts.
Lower interest rates have caused the dollar to slide in value against other major currencies. And, for foreign governments, the devalued dollar makes investments in these financial institutions cheap.
In the 1980s, Japanese investors snapped up real estate and invested in businesses across a number of sectors. This new wave of foreign investment is different because Asian and Middle Eastern governments are taking stakes in financial institutions – a cornerstone of the U.S. economy.
The deals have been structured so that the sovereign funds are passive investors with no seat on the board, and this escapes regulatory scrutiny. This week President Bush said Thursday he was “fine” with foreign investors snapping up big stakes in U.S. banks and financial firms.
“These are non-controlling investments, provides capital, and really is a statement of confidence,” said John Douglas, a partner with law firm Paul Hastings who heads its global bank regulatory practice. “There’s a lot of good things here.”
But some banking analysts believe these government-sponsored funds might get more say than the banks are admitting.
“The Chinese are putting $5 billion into Morgan Stanley without there being some kind of quid pro quo of what they’re going to get other than interest on their investment,” said Dick Bove, an analyst with Punk Ziegler & Co. “It’s part of a major shift in the worldwide financial system that I think will be very negative to the U.S.”