Fallout: The Financial Crisis

What will China do with all that money?

Scott Tong Oct 27, 2008
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Fallout: The Financial Crisis

What will China do with all that money?

Scott Tong Oct 27, 2008
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TEXT OF STORY

Scott Jagow: While the U.S. and Europe give truck loads of money to banks and markets, China’s government is sitting atop a mountain of cash — almost $2 trillion in foreign reserves. So what everybody wants to know is: What’s China going to do with all that money? From Shanghai, Marketplace’s Scott Tong has this report.


Scott Tong: Should China swoop in like a superhero and save the world from the clutches of recession? After all, Beijing’s $1.9 trillion in foreign reserves would go a long way toward bailouts, or investments just when the market needs them.

Ask around Shanghai, and Mr. Feng, the noodle shop owner, says bad idea:

Mr. Feng (voice of interpreter): We have our own problems. And why rescue evil America? It sticks its nose in our political business.

In the other corner, MBA student Lynn Yang:

Lynn Yang (voice of interpreter): The financial system is like the human heart. If it has problems, eventually the rest of the body will, too. The U.S. is the world’s heart — if it suffers, it’ll spread to China.

So, what would “rescue” actually mean?

First, let’s get one thing clear: China is already massively “in” the U.S. market: its invested hundreds of billions of dollars in Treasury bonds. The question is whether Beijing gets out of those bonds and into American stocks.

Michael McCormack is with the financial consultancy Z-Ben Advisors: He expects China to diversify slowly, since this money has to be around for 50, even a hundred years.

Michael McCormack: These sovereign wealth funds were created to fund the future retirement needs for the population. It’s the rainy day money. You don’t gamble with the rainy day money.

China has other reasons to be gun shy: it wants to step softly, to avoid political heat from Washington. And Beijing is new at this — last year, it invested $7 billion in Morgan Stanley and private-equity giant Blackstone, and both those stocks have lost more than 50 percent.

Frank Song teaches finance at Hong Kong University. He thinks China’s risk-aversion means it will get in late.

Frank Song: You may lose a lot of opportunities. But stability outweighs profitable return.

So don’t crane your neck looking for financial Superman. Think Clark Kent in slow-mo, shuffling over to the phone booth.

In Shanghai, I’m Scott Tong for Marketplace.

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