The Great Wall Street of China

It has underwritten American consumers’ spending frenzy and picked up part of the tab for American mortgages. Is Beijing now going to assume ownership of a slug of Wall Street too?

Morgan Stanley, bounced into rescue talks by reeling share and debt prices, is in talks with China’s sovereign wealth fund. China Investment Corp may lift its 9.9 per cent stake in the US investment bank, made last December, to 49 per cent. Fair enough. If CIC believed Morgan Stanley was worth buying when the share price was above $50, it could, all else being equal, be almost twice as attractive at around $30. But China should be wary of playing buyer of last resort to hobbled US firms.

First, if western regulators and market players struggle to price assets and liabilities, China will find it impossible. This is a country where risk pricing is still in its infancy. Chinese regulators have warned banks and insurers not to dabble further in overseas investments; for the state then to do just that would be socialism gone mad. Second, becoming the biggest shareholder would imply operational input and influence likely to give US policymakers and politicians apoplexy. And China, deep though its pockets are, also has battles on the home front. Stalling economic growth is bad news for the domestic banking system and job creation. Unemployment fears rise once real economic growth slips below 8 per cent; and unofficial forecasts are dipping close to that level.

Then again, history has shown time again that bold moves can pay off: witness Hong Kong’s much-derided intervention in the stock market in 1998. If CIC can pick up a slice of Wall Street for a song, and doomsday scenarios fail to pan out, this could turn into an epoch-making deal. At that point, the trick will be to persuade Washington that divestment means passing the stake to a Chinese bank, not returning it to US hands.

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