Conservative Voices Urge Pull-back from Western Financial Markets

The investments made by Chinese institutions in western financial firms are not smelling rose-like.  They mostly seem to have been the victims of bad timing, bad advice, or just plain bad luck. And while most of the problems still amount to book losses and may yet yield value, they add up to a considerable number of billions of dollars, and this has strengthened the voices of conservatism in Beijing who urge a retreat behind the old walls. In this climate, whether China will allow itself to join in the international effort to unclog the credit markets remains problematic.

PingAn’s investment in Fortis, a European insurer-banker, may have suffered a loss of over $3 billion, or 93% of its original investment, within a year. China Investment Corporation’s (CIC) investment in Reserve Primary Fund, of $5.4 billion, is frozen, though it may be recouped, but that is the best it can expect. Its investment in Blackstone has also seen a 75% book loss. Chinese state-owned banks such as Bank of China and China Construction Bank still have around a hundred billion dollars invested in the US credit default swap market.

Scholars in Beijing have suggested publicly that the government ought to be cautious in investment. The China Securities Regulatory Commission requires listed companies to be careful in investing in overseas futures products, and never be speculative.

Chinese insurance companies, such as PingAn, under the pressure of huge book losses in their overseas investments, are putting more emphasis on domestic and traditional insurance business to relieve performance pressure.

China Life Insurance Company (China Life), with smaller losses, is moving out into rural markets. China Life president Yang Chao says the company has decided to promote its business in rural areas and develop insurance among migrant workers, pension and medical insurance for farmers, and insurance for farmers who have lost land. China Life’s market share in China’s rural area has reached 54%.

China Life has launched its rural insurance business in nine provinces, and is expected to make good progress this year.

The China Insurance Regulatory Commission recently required insurance companies to find a balance between the insurance business and investing, and banned them from using investment gains to offset insurance losses. Supervisors�are concerned that some domestic property insurance companies may be covering losses with investment returns.

Dispute is still raging in Beijing over whether China should acquire equity in US financial institutions and other companies. Li Rongrong, director of State-owned Assets Supervision and Administration Commission of the State Council, has publicly encouraged Chinese state-owned enterprises to seize the opportunity and accelerate overseas M&A. Li believes M&A is an effective method for a company’s development.

Ha Jiming, chief economist of the China International Capital Corporation, said in a report that China should buy more heavily into US national debt, and should do it before other countries do. In the process of the cooperation, China can reach favorable agreements with the US, including allowing US companies to sell high-tech products to China. But other scholars suggest China should be more cautious before the real situation of the overseas market reveals itself.