Hear the thundering herds and sniff the wind

It’s time to beat the drums and cymbals! Fire the crackers and light the fire-works! China has risen!

China Investment Corporation buys 10% stakes in iconic American money machines, Blackstone, a very successful private equity investor, and Morgan Stanley, a premier investment bank. Citic has a stake in Bear Stearns [Since aborted, just before Bear Stearns collapsed in March: AT] another American investment bank.

Our Singaporean friend Temasek is in discussions to buy into another American icon, Merrill Lynch [Temasek became Merrill’s largest shareholder, buying US$5 billion worth of shares and has just bought another $3.4 billion of new stock, but will be reimbursed for the losses it has suffered on its initial investment. It has originally bought stock at US$48. At the time of the second investment, the stock was trading around US$24: AT]

And the Government of Singapore Investment Corporation (whose chairman is one Lee Kuan Yew, Minister Mentor of Singapore) is thinking of buying into Citi.

Citi has also approached us.

We have American at our mercy.

Hang on a minute. I’m getting carried away. American has conned us once.

China and the rest of Asia have been lending money to Americans so that they (the Americans) can buy cheap goods from us. It works this way. American has budget and current account deficits. They should be cutting consumption.

But because East Asian economies want to continue growing fast, and in order to keep their goods competitive vis-a-vis each other, Asian governments were big buyers of US government securities (“treasuries”).

It seemed a “prizes for all’” bargain. Americans got cheap goods, Asians got good growth. All because Asians used the money they were paid by the Americans to finance more American purchases.

But when the US dollar began to weaken against the Yen and Euro, we all found that we were losing money. Adding insult to injury, we were not being compensated by higher US dollar interest rates. Our buying of US securities (to keep our currencies cheap against the US dollar) kept US interest rates low.

We had made a pact with the capitalist devil: a Faustian pact if ever there was one.

At least Faust got knowledge and Helen of Troy. We didn’t even get good margins. The plutocrats’ The Economist reports that China “accounted for just $3.70” of an iPod retailing for US$244 value. “The largest bite was claimed by Apple: about $80 in gross profit”.

So China’s plan B was to diversify out of US treasuries. What happened?

Blackstone approached us to take a stake in them before it went public or IPOed. In China investing in a company before it IPOs, means obscene profits. Look at Temasek’s unrealised profits on its sales of stakes in Bank of China and China Construction Bank. And the book profits that other foreign investors made in these banks. [Not that obscene after recent falls, but still decent enough: AT]

But our US$3 billion investment in Blackstone was 20% [Now a lot more: AT] in the red, while our recent £1.5 billion investment in British bank Barclays was down 32%. At least in the latter, Temasek is sharing our pain. [It got worse. In June, the price fell below its rights price of 282 pence each with China Development Bank investing a further £136 million in the latest offering, while Temasek invested up to £200 million: AT]

Let’s hope our US$5 billion investment in Morgan Stanley do not also tank in the short term. [It has: AT]

As that decadent, homosexual playwright Oscar Wilde wrote, “To lose one parent may be regarded as a misfortune, to lose both looks like carelessness.”

To have three investments in a row lose money very soon after we invest is an insult to the Chinese people whose money was lost. At least Temasek had a winning run before it stumbled badly over Shin.

I may be accused of being paranoid, but why did Blackstone, Barclays (Britain is a running dog of the Americans), Citi, Morgan Stanley, Bear Stearns and Merrill Lynch, approach us or our friend, Singapore? Can’t they find American or European investors. Where are the Arabs? Why is Fidelity, Warren Buffett, Carlyle, or TPG not investing?

If they were approached, why are they giving these a miss? Do they think that these companies are overvalued or things will get worse?

Or as Buffett once grumbled, investors only get whatever is left over, after investment bankers get paid their obscene salaries. He should know, he invested in an investment bank, one of his less successful investments.

Remember, the American investors can put their ears to the ground to hear the thundering herds, and lift their noses to sniff the wind. Warren Buffet certainly does that and he has just bought an industrial conglomerate, not a financial institution. [In late December, Buffet told CNBC that he had turned down opportunities to invest in financial institutions: AT]

And if Buffett and friends were not approached, why not? A cunning plot to weaken the Chinese people, to ensure continued US hegemony? Congress’s deafening silence on the “Red Peril” to American financial icons must signify something.

Finally, remember history.

When the Japanese got wealthy through selling to America, they were persuaded into buying iconic properties (like Rockefeller Center) and movie studios (like MGM). They were sold dogs by the Americans and the Americans were able to repurchase these assets at great prices. And the Japanese lost on the foreign currency exchange too.

China sold tea to the British in return for silver, Chinese silver. China got opium, a drug which weakened China’s moral fibre, allowing the West to carve out China among themselves.

All these august financial names becoming available for sale could be the opium that weakens the Motherland. Did Mao and our parents die so that we can buy rotting, decaying, imperialist, capitalist icons?

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Adrian Tan (AT) came across this internal Chinese Communist Party memo while scavenging for food in Shanghai. It was written by a senior cadre in mid-December 2007; and addressed to the standing committee of the Politburo. The cadre has since been promoted. And China passed on Citi. On his return to Singapore, AT has updated the piece by annotating it.

About the author

Adrian Tan once did corporate law before straying into financial services: corporate finance, fund management and then equities broking.

He has done some PR/ IR and his articles have appeared in Singapore’s mainstream media publications.

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Cartoon from My Sketchbook.

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