Caution ahead

Many modern Chinese like to talk about "opportunities coexisting with risks", but the short history of Chinese financial juggernauts investing in the Western economies battered by the spreading subprime crisis reminds us more of risks than opportunities.

The most frequently cited lesson is from the China Investment Corporation (CIC), the $200 billion sovereign wealth fund, which invested in US private equity firm Blackstone before the latter's stock price kept sliding to half of the bidding price by CIC last week.

Still, some economists claim the economic woes following the US subprime crisis have provided rare, if not unprecedented, opportunities for Chinese investors to buy into their firms at a lower price.

Last week, the US Federal Reserve announced a plan to inject an additional $200 billion into the banking system to save it from the ongoing credit crunch. Other central banks in Europe and Canada were also planning their own capital infusion plans. Moreover, the Fed was easing lending rules and for the first time accepting mortgage-backed securities as collateral.

While the stock market reacted strongly, with the Dow Jones industrials surging 416 points the next day, their biggest one-day point gain since 2002, analysts says this may just be an ephemeral rebound before it returns to the downslide cycle.

The US economy may remain in a slump in the next two or three years, many economists say.

"I think it may take two or three years for the US to recover from the crisis," says Wang Li, researcher with the Chinese Academy of International Trade and Economic Cooperation of the Ministry of Commerce. "When a major crisis hits, it is not easy to recover. It is currently far from the bottom of the market."

The US economic slowdown augurs bad for the Chinese economy, analysts say, as it will reduce foreign demand for Chinese exports, which are a major driving force for the country's economic growth.

But just as a coin has its two sides, the US-triggered crisis may provide Chinese enterprises and the nation as a whole with opportunities to do what they were unable to do in the past, says Lian Ping, chief economist of the Bank of Communications.

He suggests that the emerging-market economies, including China, may take the chance to improve its status in the international financial regime and become a more influential rule maker.

In the past decades, the Western economies have been leaders of the global financial markets, controlling the financial policymaking of the world, he says. But in recent years, their financial prowess has been in the decline in contrast with the rise of the emerging economies.

"The subprime crisis is actually one suffered by the traditional financial system led by the US while it provides a good opportunity for the emerging economies to restructure the global financial regime," Lian says.

He suggests that the emerging-market economies could increase their influence in global financial policymaking by expanding their voices in such international organizations as the International Monetary Fund and the World Bank.

His suggestions seem unrealistic to many, but may provide a clue to how China could play a more active role in the global financial market, analysts say.

"No doubt, the international financial regime is undergoing a structural change, which is catalyzed by the subprime crisis," Lian says.

The process of integrating more closely into the international financial regime, however, will prove to be a bumpy road and may meet unexpected hurdles, he says.

The US remains a leader among international organizations, and it is hard for other countries to share its power, Wang Li says.

On February 7, the US Senate held a hearing on the implications of investment by the world's sovereign wealth funds eyeing on US assets. The US reportedly also asked the Europe and IMF to map out explicit rules governing the operation of sovereign funds.

It shows that it is not an easy game for investors from other countries to take advantage of the crisis to reach into the US financial markets, analysts say.

"They (Western economies) may not like to see the emergence of the sovereign funds and even feel puzzled and nervous," Tan Yaling, an economist with the Bank of China, says.

The biggest uncertainty is how the financial crisis will evolve in the coming months.

Many economists say the US's economic woes will not ease soon and it may take some years for the economy to recover.

"The US credit system is quite sophisticated," says Ma Ming, an economist with the Beijing Institute of Technology. "The country has been relying heavily on the credit-backed system and it will take quite some time to disentangle the financial mess."

Ma says it is almost impossible for Chinese investors to buy US assets at the lowest price. "Therefore, they should gradually increase their investment."

Sun Lijian, economist with the Shanghai-based Fudan University, says any investment by the emerging market economies should be cautious and for China, it should not allow its sovereign wealth fund to invest abroad in a mass scale.

"The injection of the US Fed is just a sign that the worst is yet to come."

Besides, the US financial institutions may temporarily conceal their losses in their off-balance sheet businesses, which means they would register more losses in the future.

"It is hard to evaluate foreign assets," Sun says. If we made a wrong decision, it may incur serious losses for China's investment companies, he says.

Capital used by the sovereign fund for investments is actually what taxpayers pay. Therefore, policymakers should be cautious in using it to make investments when Western markets are so volatile, Sun says.

"If they like, private enterprises and funds can go out and invest in the Western market at this time," he says.

(China Daily 03/17/2008 page3)