Amid the flurry of news items about Chinese acquisition plans abroad, there is an interesting piece by Geof Dyer in today’s Financial Times that may put things in a little perspective.
Normally, when companies have an extremely valuable currency with which to make acquisitions (relatively highly valued share prices), it makes sense for them to make acquisitions. With several Chinese companies receiving valuations on the Shanghai and Shenzhen markets that make them far more valuable than better-managed companies abroad with significantly higher earnings, this should be a slam dunk for Chinese companies. They should use their expensive share prices to make major foreign acquisitions, and so protect themselves from a deflation of the Chinese bubble while picking up higher-yielding assets.
The problem is that their currency, like the RMB itself, has limited value abroad.Restrictions on foreign ownership mean that they cannot use their shares to swap directly into foreign holdings – foreigners cannot own their mainland-traded shares. They also cannot raise enough cash directly.The Chinese market itself is actually very small when you eliminate roughly 65% representing non-tradable shares, and almost another 20% representing tradable shares that are very unlikely to be traded. That makes it difficult to sell enough shares domestically to use the proceeds to convert into foreign currency and buy foreign-listed shares.
Still, it would be great for domestic monetary policy if this were to happen. The problem would be for local investors.They would be buying overvalued domestic shares, which would then be converted into an overvalued foreign currency to buy foreign shares. Local investors would probably take a double loss.
By the way once again we are hearing rumors of a lending freeze. This seems to occur regularly every year around this time, probably because every year around this time, in spite of a desire by the financial authorities to slow lending growth, the amount of new loans year to date has blown out last year's total. I am not sure we should take those rumors too seriously. Every year in the fourth quarter loan growth slows somewhat, only to mushroom early next year.As long as the currency regime is in place, lending growth will continue, and the only impact that any serious constraint on bank lending will have will be to force loan growth in the unregulated informal banking sector.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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November, 2007
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