US exorbitant privilege (ability to pay very little for foreign liabilities and make high returns on foreign assets) is going away faster that I thought. After capital injections by Abu Dabi into Citi, it was announced that China Investment Corporation buy 9.9% (USD 5bn) stake in Morgan Stanley. CIC is said to remain a passive investor without any special right to name board members.
Think what it means for a moment. In the last few decades US borrowed cheaply from world central banks and private investors at its treasury yield and invested in private and public equities worldwide. With subprime crisis hitting asset values in the US, emerging markets wealthy investors (including SWFs) step in and buy cheaply, which indicates that once situation stabilizes (and it always does, question is when) these investors will be able to enjoy very high returns (as a premium for courage to buy in bad times).
It could still work out in the US favor. It may be that over the next decade returns in emerging markets will be high relative to US markets and EM currencies will appreciate against the dollar, so US makes more on foreign assets than it pays for its foreign liabilities. But this scenario is expected by many investors, so the home bias should fall anyway and Asian and Gulf investors will also buy more EM assets, relative to historical averages. Taking all this into account I draw a conclusion that US will no longer be able to play the global hedge fund role (taking leverage and buying equity, to put it simple). Transactions such as Blackstone, Citi, Morgan Stanley, and maybe more to come do suggest that world has changed, and that many capital surplus nations are accepting higher credit risk in exchange for higher expected return in the longer run.
This must lead to fast changes in the global financial architecture. I expect China financial markets to dwarf those in UK and US, and I expect that it will happen sooner than most people predict. To get a feel for a pace of change recall that China share in global exports of telecom equipment went from 7% to above 20% in just five years, machinery exports from 3 to 9% in five years. So fasten your seat belts, the ride begins …
Later addendum: Merill Lynch has just announced that Singapore based Sovereign Wealth Fund Temasek may buy a 5bn stake in the bank, and that this investment may not be a passive one.