China Inc. is at it Again

China's state investment company made its first big play back in March when it bought a stake in the Blackstone Group for $3 billion. That investment is still underwater, but that hasn't stemmed China's interest in investments outside the world of US Treasury's. Today it was announced that a Chinese government controlled bank and Temasek, Singapore's state-controlled investment arm, have agreed to buy a stake in Barclay's bank. That move will generate the cash that Barclay's needs to purchase ABN Amro. China's advisor on the deal? You guessed it . . . . Blackstone Advisory. Here's the story from Jason Dean at the WSJ:

BEIJING – China Development Bank's planned stake in Barclays PLC could become the largest overseas investment by a Chinese company to date, and underscores the growing role China Inc. is playing the global corporate arena.

China Development Bank, a Chinese-government controlled policy lender, and Temasek Holdings Pte. Ltd., a Singapore government investment agency, will together invest as much as €13.4 billion ($18.54 billion) in Barclays, the British financial group announced Monday.

China Development's stake will be the larger of the two: it will buy up to 2.2 billion euros of new shares in Barclays initially, amounting to a 3.1% stake, Barclays said. China Development will then buy as much as €7.6 billion worth of additional Barclays's shares, if the British bank's bid succeeds for ABN Amro Holding NV – and if the deal wins regulatory approval, Barclays said.

If the whole deal is completed, China Development would spend a total of $13.5 billion for its stake in a newly enlarged Barclays, dwarfing other overseas deals by Chinese institutions.

Earlier this year, China's government agreed to invest $3 billion of the country's foreign-exchange reserves in U.S. private-equity giant Blackstone Group. In October 2005, China National Petroleum Corp. agreed to buy PetroKazakhstan Inc. for $4.18 billion. Earlier that year, Lenovo Group Ltd. bought the personal-computer division of International Business Machines Corp. for $1.25 billion.

Chinese companies have tried for bigger deals before – and failed. In 2005, China's Cnooc Ltd. abandoned an $18.5 billion bid to acquire U.S. oil producer Unocal Corp. after a heated political firestorm that has deterred high-profile deals ever since.

China Development may seem an unlikely investor for Barclays. Set up in 1994 by China's cabinet, its primary mission is to make policy loans to support Chinese government economic policies, such as to big infrastructure projects and to rural enterprises. In its 2006 annual report, China Development states its mission as "strengthening the competitiveness of our economy and improving the living standards of our people."

However, China's government has also been pushing the country's expanded economic activities overseas. China Development's annual report also acknowledged its growing part in this effort, saying: "In answer to the call of the State to encourage domestic enterprises to 'Go Global,' the Bank engages in a wide range of international cooperative activities."

China Development said it had been advised in the deal by Blackstone Advisory, an arm of Blackstone Group.

"Barclays Stake Sale Shows Rising Role of China Inc."
Jason Dean

The End of the Yen Carry Trade?

Much has been made of the prevalent role of the Yen carry trade in today's market. So let's start with a little education. What exactly is the Yen carry trade? Here's the definition via the San Francisco Fed:

In the most common version of this strategy, an investor borrows a given amount in a low-interest rate currency (the “funding” currency), converts the funds into a high-interest-rate currency (the “target” currency) and lends the resulting amount in the target currency at the higher interest rate.

In today's market the "funding" currency is often the Yen which the BOJ has kept at or near 0% for over a decade as they attempt to jump start their economy. The target currency is often the USD, as hedge funds and insurance companies have crowded into the strategy to bump up their returns. So how does the carry trade effect the markets? (from Gillian Tett at FT.com):

Just how large the carry trade is, nobody really knows ... But whatever the precise number, what is clear is that carry trades have been fueling the dash into risky assets in the past couple of years.

After all, with Japanese interest rates at rock bottom and the yen on a downward path, it has been frighteningly easy for any hedge fund to borrow in yen, invest in something yielding, say, 5 per cent a year, apply a bit of leverage and – hey presto – produce returns of 20 per cent, or more. Conversely, if an investment bank wants to create a collateralised debt obligation but cannot sell the riskiest debt tranche, it can put this on its own books – funded by ultra cheap yen. The yen has thus been tantamount to the ATM of the global credit world – spewing out (almost) free cash.

So when will the carry trade end? It certainly looks as if Japan's economy is finally growing. Though the weak first quarter numbers, 2.4% annualized, left a little to be desired the growth is solid and should be sustainable. While no rate hike is currently expected, if you read into Toshihiko Fukui's rhetoric he has left the door open to raise rates above 0.5% even if consumer prices continue to fall as long as growth continues. So don't be surprised if by the end of 2007 the Yen reverses trend in FX markets against the USD and wipes away the carry trade. Using the past as a guide, the last major period of Yen carry trade activity was from the summer of 1995 to October of 1998. In October of 1998 the Yen appreciated 18% in just three days, burning many in the process and contributing to the meltdown at Long Term Capital Management. Unfortunately exchange rate movements are notoriously difficult to predict. When the Yen does recover it is safe to say that the fluctuation could be dramatic and the unhedged will be hurt badly. For more on the Yen carry trade check out these links:

Mish's Global Economic Analysis
MarketThoughts.com
Federal Reserve Bank of San Francisco

Thomas Friedman: Green Is the New Red, White and Blue

Thomas Friedman is a three time Pullitzer Prize winning New York Times columnist and the author of National Bestseller The World Is Flat. When he takes a position on a major geopolitical issue people usually take notice. Just this week Mr. Friedman penned an article entitled "The Power of Green." Friedman's arguments are not all new, but he has an amazing knack for synthesizing ideas and giving them new energy. The backbone of this piece is something we are all vaguely aware of (thanks in no small part to Al Gore's An Inconvenient Truth): if the world doesn't start limiting its carbon emissions now, the CO2 levels in the atmosphere will double by midcentury and the earth's climate system will go "haywire."

The good news is America has more reasons than ever to start now.

1. Geopolitical Reasons: Green = A Sustainable Future. We can reduce our carbon emissions all we want but the 3 billion people coming on to the world economic stage in Braizil, Russia, India and China (BRIC) need to housed, clothed and fed and currently carbon is the cheapest way to fuel that growth. The US grew "dirty" so we can't expect the BRIC countries to grow clean if it is costlier. We need renewable energy to reach the "China Price" (as cheap as coal) in order to ask the BRIC countries to grow clean. To do that we need to take the lead in developing and implementing the technologies to make it a reality.
   
2. Patriotic Reasons: Green = Win the War on Terror. America's addiction to oil means we are financing both sides of the War on Terror: our tax dollars pay for our troops and our petrodollars enrich the Saudis and Iranians who in turn finance the export of fundamentalist Islam. That support tilts "the Islamic world in a more intolerant direction" and extends our War on Terror to younger generations. In other words using less foreign oil will quite literally dry up much of the funding for extreme fundamentalists.
   
3. Capitalist Reasons: Green = Profits: There are huge economic incentives to being the world's leading supplier of renewable energy, and it feeds right in to our strength as a capitalist society. We can be the world economic leader on clean energy, and supply the "technologies that billions of others need to realize their own dreams without destroying the planet." Already Wal-Mart, GE and others are investing billions in clean energy solutions. But, the free market alone cannot sustain the kind of investment needed to create the solutions. We need our government to support the drive.

So what does this all mean. Well Mr. Friedman thinks it means that to be "green" no longer means being "liberal" or "tree-hugging", today being "green" is really all about being geostrategic, patriotic and capitalistic. Now that is a type of green that can appeal to the flag-waving American masses.