On Tuesday, the Federal Reserve gave the green light to China Investment Corporation (CIC) – a wealth fund owned entirely by the Chinese government – to buy up ten percent of voter shares in the U.S. financial firm Morgan Stanley. The announcement made headlines throughout the U.S. financial landscape.
“CIC has stated that it does not propose to control or exercise a controlling influence over Morgan Stanley and that its indirect investment will be a passive investment,” Fed officials said in a statement.
That means, among other things, that CIC will not attempt to exercise any controlling influence over the company, seek more than one representative on the board of directors, or have any other director, officer or employee relationship with Morgan Stanley.
But for some in the U.S., foreign direct investment like this by the Communist Chinese government is cause for concern. In fact, some members of Congress have, in recent months, sought to block Chinese businesses from venturing into the U.S. market.
In August, for example, Republican Senators Jon Kyl of Arizona and Kit Bond of Missouri, along with six other senators, sent a letter to the Obama administration asking to block the Chinese telecommunications company, Huawei, from doing business in the U.S. with Sprint Nextel. Their reasoning, according to the letter, is that the Chinese company would harm U.S. businesses and pose a threat to national security.
Also in August, China’s Anshan Iron and Steel Group (Ansteel) announced it was going to cancel plans it had in the works with Mississippi-based Steel Development Company to construct five plants in the U.S. When the deal was originally reached back in May, 50 Congressmen sent a letter to members of the Obama administration asking them to investigate the deal, saying it posed a threat to national security as well as to American jobs.
Clearly, there is some hostility to the idea of Chinese companies doing business in the United States. When it comes to the Morgan Stanley deal however, concerns are, or at least should be, unwarranted, according to two financial experts.
In an interview with The Daily Caller, Patrick Chovanec, associate professor at Tsinghua University’s School of Economics and Management in Beijing, said the Fed’s decision to allow CIC to invest in Morgan Stanley should not be cause for concern. Not only that, but CIC isn’t even benefitting from the deal.
“The important thing to realize is that this is not a new deal,” said Chovanec. “This is the unfolding of an arrangement that took place back in 2007 when CIC bought securities that were required to convert to common shares in 2010.”
Nicholas Lardy, senior fellow at the Peterson Institute for International Economics, agreed, telling TheDC by phone that CIC’s Morgan Stanley investment had been in the works for quite some time. And, he added, it is actually a good thing.
“It’s not like CIC is buying 10 percent of Morgan Stanley out of the blue,” Chovanec added. “This story is three years old.”
According to Chovanec, any concern about this deal is more ironic than anything else.
“In China, this is actually being viewed as an embarrassment,” he said.
In 2007 – pre-financial crisis – when CIC first invested in Morgan Stanley, they bought shares in the upper forty-dollar range. Now, the company’s stock is in the 20’s. “So in conversion, CIC has lost a lot of money on the transaction,” said Chovanec. “And they have come under a lot of criticism in China.”
He also pointed out that in 2008, when Lehman Brothers collapsed, Morgan Stanley was looking around for additional funding to help it stay afloat. At that point, the financial firm talked to CIC about making additional investments. But the Chinese firm wasn’t interested.
As for the political concerns, Chovanec said those are nothing new. The question of whether their agenda is financial or political shadows every Chinese investment made in the United States. But politicizing business moves, he said, “sends the wrong message.”
In the long run, politicization of Chinese business practices benefits no one and makes the American market less attractive, Chovanec explained.
“It’s a really self destructive game to play with the Chinese,” Chovanec warned. “It gives the Chinese an excuse to wall off portions of their economy and prevent U.S. companies from going to China.”