Saturday, December 06, 2008

Be kind to your creditors

The Atlantic has a long interview with Gao Xiqing, president of the China Investment Corporation, which manages about $200 billion of the country’s foreign assets. CIC makes most of the high-visibility investments, like buying stakes in Blackstone and Morgan Stanley. Gao was a professor in China, then earned a law degree at Duke and practiced here before returning to China.

...His office, in one of the more tasteful new glass-walled high-rises in Beijing, itself seems less Chinese than internationally “fusion”-minded in its aesthetic and furnishings. Bonsai trees in large pots, elegant Japanese-looking arrangements of individual smooth stones on display shelves, Chinese and Western financial textbooks behind the desk, with a photo of Martin Luther King Jr. perched among the books. Two very large, very thin desktop monitors read out financial data from around the world. As we spoke, Western classical music played softly from a good sound system.

Gao dressed and acted like a Silicon Valley moneyman rather than one from Wall Street—open-necked tattersall shirt, muted plaid jacket, dark slacks, scuffed walking shoes. Rimless glasses. His father was a Red Army officer who was on the Long March with Mao. As a teenager during the Cultural Revolution, Gao worked on a railroad-building gang and in an ammunition factory. He is 55, fit-looking, with crew-cut hair and a jokey demeanor rather than an air of sternness. ...

About the financial crisis of 2008: We are not quite at the bottom yet. Because we don’t really know what’s going to happen next. Everyone is saying, “Oh, look, the dollar is getting stronger!” [As it was when we spoke.] I say, that’s really temporary. It’s simply because a lot of people need to cash in, they need U.S. dollars in order to pay back their creditors. But after a short while, the dollar may be going down again. I’d like to bet on that!

The overall financial situation in the U.S. is changing, and that’s what we don’t know about. It’s going to be changed fundamentally in many ways.

Think about the way we’ve been living the past 30 years. Thirty years ago, the leverage of the investment banks was like 4-to-1, 5-to-1. Today, it’s 30-to-1. This is not just a change of numbers. This is a change of fundamental thinking.

People, especially Americans, started believing that they can live on other people’s money. And more and more so. First other people’s money in your own country. And then the savings rate comes down, and you start living on other people’s money from outside. At first it was the Japanese. Now the Chinese and the Middle Easterners.

We—the Chinese, the Middle Easterners, the Japanese—we can see this too. Okay, we’d love to support you guys—if it’s sustainable. But if it’s not, why should we be doing this? After we are gone, you cannot just go to the moon to get more money. So, forget it. Let’s change the way of living. [By which he meant: less debt, lower rewards for financial wizardry, more attention to the “real economy,” etc.]

About Wall Street jobs, wealth, and the cultural distortion of America: I have to say it: you have to do something about pay in the financial system. People in this field have way too much money. And this is not right.

...Individually, everyone needs to be compensated. But collectively, this directs the resources of the country. It distorts the talents of the country. The best and brightest minds go to lawyering, go to M.B.A.s. And that affects our country, too! Many of the brightest youngsters come to me and say, “Okay, I want to go to the U.S. and get into business school, or law school.” I say, “Why? Why not science and engineering?” They say, “Look at some of my primary-school classmates. Their IQ is half of mine, but they’re in finance and now they’re making all this money.” So you have all these clever people going into financial engineering, where they come up with all these complicated products to sell to people.

About the $700 billion U.S. financial-rescue plan enacted in October: Finally, after months and months of struggling with your own ideology, with your own pride, your self-right-eousness … finally [the U.S. applied] one of the great gifts of Americans, which is that you’re pragmatic. Now our people are joking that we look at the U.S. and see “socialism with American characteristics.” [The Chinese term for its mainly capitalist market-opening of the last 30 years is “socialism with Chinese characteristics.”]


On what might make the Chinese government start taking its dollars out of America: (I began the question by saying that China would hurt itself by pulling out dollar assets—at which he interjected, “in the short term”—and then asked about the long-term view).

Today when we look at all the markets, the U.S. still is probably the most viable, the most predictable. I was trained as a lawyer, and predictability is always very important for me.

We have a PR department, which collects all the comments about us, from Chinese newspapers and the Web. Every night, I try to pick a time when I’m in a relatively good mood to read it, because most of the comments are very critical of us. Recently we increased our holdings in Blackstone a little bit. Now we’re increasing a little bit our holdings in Morgan Stanley, so as not to be diluted by the Japanese. People here hate it. They come out and say, “Why the hell are you trying to save those people? You are the representative of the poor people eating porridge, and you’re saving people eating shark fins!” It’s always that sort of thing.


...I have great admiration of American people. Creative, hard-working, trusting, and freedom-loving. But you have to have someone to tell you the truth. And then, start realizing it. And if you do it, just like what you did in the Second World War, then you’ll be great again!

If that happens, then of course—American power would still be there for at least as long as I am living. But many people are betting on the other side.

7 comments:

hcl said...

People, especially Americans, started believing that they can live on other people’s money. And more and more so.

And doing so successfully. Exploiting dollar hegemony to print up as much money as it wants is the U.S. government's game. Build military with said funds, conquer world, repay nothing.

Meanwhile, foreign countries (especially China) are fool enough to take money inflated away at a rate of ~5% annually.

Yesterday, China announced it would continue to buy U.S. Treasuries.

you have to do something about pay in the financial system. People in this field have way too much money. And this is not right.

An ignorant (appropriately harsh descriptive) pinko. To own a financial firm is to hire from the top two or three schools almost exclusively. It's not just the complexity of financial jugglery, but the Poker Game: you're trying to take everyone else's chips, everyone else yours. Can't let Harry Harvard Hedge Fund outsmart yours.

About the $700 billion U.S. financial-rescue plan enacted in October... struggling with your own ideology, with your own pride, your self-right-eousness

The intervention should have not surprised anyone. Firstly, a government exists partly to intervene for the social good, and that secondly, the people putting out the neo-liberal lies understand as such perfectly.

On what might make the Chinese government start taking its dollars out of America... [Gao:]Today when we look at all the markets, the U.S. still is probably the most viable, the most predictable.

What about the negative rate of return, the risk of confiscation, and so forth? I personally would not trust $10 to either Rahm Emanuel, David Axelrod, or Bob Gates.

I was trained as a lawyer, and predictability is always very important for me.

Who put this fool in charge of a financial operation? He doesn't understand finance, judging by the interview. A sad but common case of incompetency in China's state-owned sector.

and he was an associate in Richard Nixon’s former Wall Street law firm.

Ah, the Rockefeller law firm Nixon was parked in. Do the NWO folks own everyone behind the scenes? Gao also serves on the Duke University Board of Trustees, and is interviewed by the neocon Atlantic Monthly. Hmmm. If he's owned, that would explain the inexplicable investment in Blackstone and MS. CIC doesn't understand Wall Street at all, see:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a4qkZDueQTwA&refer=home

Anonymous said...

Why do the CEOs of Intel, GM, Pfizer, etc. have no technical background?

Could someone explain why MBAs and JDs are running "technical companies".

A JD can run a liability insurer. An MBA can run a distributor. But how can a guy with a degree in economics and an MBA run Intel? A lawyer from McDonalds run Pfizer?

Why is my question stupid?

hcl said...

you have to do something about pay in the financial system. People in this field have way too much money... The best and brightest minds go to lawyering, go to M.B.A.s... I say, “Why? Why not science and engineering?”

Notice Gao believes executives (MBA), lawyers, and financiers do not create value. At least that's what is implied.

I'm guessing he has a fairly primitive economic model in his head: the communist Heavy Industry Model where engineers and laborers create everything, and anyone else is unimportant or parasitic. He simply doesn't comprehend the service sector contribution to welfare.

Unbelievably, he's baffled that students choose finance (a field he himself chose over science), even though he explains in the previous sentence its far higher pay... he doesn't understand incentives either.

Just how much does he manage, $200 billion? He's probably best off losing 5% a year in Treasuries than get ripped off by agile usurers in NYC and London. He's lost, what, ~$5 billion dollars alone in the past 1.5 years on MS and Blackstone?

It's better to pay ten million in salary to a quality guy than have someone like this who loses $5 billion on investments purchased without due diligence, that he hasn't the intelligence to analyze.

Anonymous said...

"Notice Gao believes executives (MBA), lawyers, and financiers do not create value. At least that's what is implied."

And they don't. They are parasites.

Google, Microsoft, Apple, Intel, etc.

What innovative companies have been founded by prevaricating bean counting salesmen speculators?

An MBA or JD in todays world is indistinguishable from the Soviet apparachik's degree in political science or economics. It is a degree in ideology, a test for party membership, and otherwsise totally useless.

STS said...

It's telling that Gao himself didn't study science or engineering. I'm sure that speaks volumes to anybody asking his advice about a career.

MaysonicWrites said...

hcl said:.. he doesn't understand incentives either.

No. He understands incentives. He just believes (rightly) that the incentives in America are badly skewed. He understands full well why students choose finance or law rather than science or engineering, even though their doing so ends up creating less societal value while making them personally more financially wealthy. Just one more tragedy of the commons situation.

Antoine Zhang said...

HCL's mind is far too feeble to extract the marrow of meaning from even a simple sentence.

Anyone who imputes so much spurious significance to basic sentences obviously lacks any aptitude for critical apprehension.

And use of the anachronism "pinko?" About as fashionable and relevant as the term "Chi-Coms."

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