China, Morgan Stanley, and the Credit Crisis

In the aftermath Wall Street’s credit crisis, observers have looked to China as a potential source of capital to rescue the troubled firms. Reports of negotiations between representatives of Morgan Stanley and China Investment Corp have fed these expectations. As the New Zealand Herald reports:

As regulators work frantically to contain the rot consuming the world’s financial system, it looks likely that a significant portion of the hard cash required to put capitalism back on its feet will come not from the West, where most economies have a dearth of savings, but from the East – including communist China.

Oil-rich Middle Eastern states and fast-growing emerging economies including China possess large pools of state-controlled capital or sovereign wealth funds looking for suitable investments.

With US$3 trillion ($4.4 trillion) estimated to be under management, much of it unallocated, they have emerged as key players in world markets in the past couple of years.

Yet, as the Globe and Mail reports, the Chinese economy is suffering its own problems at the moment, preventing the country from being proactive in the current crisis:

Burned by the flop of previous investments in U.S. finance, China, the richest new player in Asia, is sitting on the sidelines of the current crisis. Instead of rushing to snap up distressed Wall Street assets, its leaders are looking with growing concern at their own, increasingly troubled economy.

China’s central bank is worried enough that it cut its key interest rate on Monday for the first time in six years, abruptly jettisoning its year-long worries about rising inflation.

To help shore up the stock market, which has already fallen 69 per cent since last fall, the government said yesterday that it will scrap the stamp duty on share purchases. It will also direct an arm of its sovereign wealth fund to buy up shares in state-owned banks to reinforce confidence in their stability.