Guest Blog: CIC to the Rescue?

Adam Dixon

Over last few days there have been conflicting reports on whether and how much the China Investment Corporation (CIC) would invest in Spain’s failing savings banks, as Spain’s Prime Minister José Luis Rodríguez Zapatero is traveling around Asia seeking support from investors.

On Wednesday reports came out indicating that the CIC would invest 9 billion euros, which would be 60% of the 15 billion euros the Banco de España has said the savings banks need to bolster their balance sheets. A day later sources from the CIC rejected these reports. But, a potential investment is still on the table.

Is it likely that the CIC will front the money? And will it put up a lot? In my view the answer is a resounding yes! Is it risky for the CIC? Probably. The Spanish savings banks are in a lot of trouble from overinvesting in Spain’s real estate market. And with an aging society and stagnant population growth, it seems unlikely that the overcapacity will be solved anytime soon.

But the CIC won’t invest because it sees an opportunity to make a profit. The CIC will invest because China does not want to see what will happen if trouble in the Spanish economy sends further tremors through the Eurozone. The current problems in Greece, Ireland and Portugal are manageable for the monetary union, given the relatively small size of those economies. However, further problems in Spain would be a whole different ball game.

Talk of a breakdown of the Eurozone in my view has been simple hyperbole or expedient political rhetoric used by politicians in the core economies to assuage their local support. Unraveling the monetary union would likely cause more pain than good. And, the core economies are partly complicit in the problems at the periphery, as their banks supplied much of the capital that fueled the excesses of the boom. However, there is only so much shared pain to go around, and a crisis in Spain would test the shared vision of the monetary union to its core.

It is important to remember that China wants stable consumer-driven economies that support its export-driven growth model. China does not want crisis. China wants stability. (Just look at recent actions to suppress political dissent). As such, making a contribution to support Spain’s failing savings banks (or investing in US investment banks at the height of the subprime crisis) is not some altruistic or even an opportunistic act.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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