Taking undue risks

Putting all of one’s eggs into a basket is a silly thing. But putting some of them into a basket with gaping holes is even more stupid.
When Chinese financial institutions have made profits from their domestic businesses, it makes sense if they look for international partners with solid basics and sound management to make money from global markets and, more importantly, to learn how to expand in a healthy way.
China Investment Corp’s investment in the Blackstone Group, a global private equity (PE) management company, was a good move - despite the temporary dips in Blackstone’s valuation. PE is a new game for Chinese institutions, but is standard practice in the developed economies.
At least, China’s interests can be backed by Blackstone’s assets, and its quality does not deteriorate amid stock market fluctuations.
The State Development Bank’s commitment to the Barclays Group, especially when the deal was announced during the latter’s attempted acquisition of ABM Amro, a respected European bank, was a move that also appeared to make a lot of strategic sense.
Using Barclays ties, the Chinese bank hoped to transform its business from a half-official, half-business entity into a fully-fledged banking institution.
Barclays reportedly got burnt by the subprime mortgage crisis in the United States. But it cannot be as bad as Bear Sterns, once a main player of mortgage-backed bonds on Wall Street.
There had long been a rumor that some Chinese financial institutions were hoping to help bail out Bear Sterns’ deeply troubled business.
Last week, as reported by an international financial information service, the China International Trust and Investment Corp (CITIC), another sovereign financial group from this country, was in talks with Bear Sterns. But two days later, CITIC denied the reported move.
CITIC should not have chosen Bear Sterns. Nor should any Chinese financial company built on tax-payers’ money. Procedurally, it can be termed as an amateurish move, unless a company can explain how big its holes are and how it will be able to mend those holes.
The crisis is still going on. It is like a man still waiting for a full diagnosis, any promise of a quick recovery in health is not guaranteed. So, strategically, the picture is still too murky and unattractive as to how one can benefit from the rumored deal.
There is also a moral twist to it. The promise of high yields from subprime mortgages has never made logical sense. With the market in default now, it is clear that the business, built up over more than 20 years, was never on a solid foundation.
Does any Chinese financial institution have to learn from such a dangerous, if not suicidal, business practice? Does China still hope to maintain a harmonious society once a debt market is in default and an investment market in turmoil?
Any overseas investment should be based on good corporate governance - through full disclosure to tax-payers. It should be debated and examined by experienced professionals.
At least, it should avoid the conclusion or impression that some Chinese eggs are being put into a basket with holes.

—The Daily Mail, China Daily news exchange item