Despite Liquidity Fears, an Institution Creeps Into PPIP

(August 20, 2009) – In the face of fears surrounding illiquidity, the Beijing-based China Investment Corporation (CIC) is reportedly moving into the American government’s plan to take ‘toxic assets’ off the books of banks.

The CIC, a $200 billion fund supported by foreign exchange reserves, is in talks with many of the firms chosen in July to be involved with the Public-Private Investment Plan (PPIP), Reuters is reporting. According to sources, the fund is ready to put up $2 billion in capital by the end of August.

Because it is by definition investing in illiquid securities – more specifically, the mortgage-backed securities (MBS) issued before 2009 that many finger as the main driver of the current recession – few American institutions have been keen to mirror China’s move.

Any investment in PPIP will be predicated upon the belief that the American property market, because it represents the underlying assets of the MBS system, will rebound going forward. This is far from certain, and this, combined with fears over mismatching liabilities with assets – as was seen at many American endowment investors such as Harvard and Stanford, among others — may be keeping many institutions away from the Treasury program. While the pre-2009 MBS market is valued at over $2 trillion, and while managers will be forced to diversify away from any one type of property or mortgage underwriter, little movement has been seen towards the program.

China’s move may say more about its internal financial situation than about the expected quality of the PPIP program. With one of the largest capital pools on earth, the CIC will ultimately be forced to ‘put money to work’ (See Dominic Hobson’s column on this topic in the first edition of ai5000). Additionally, the $2 billion investment, while dwarfing the total assets of many of the globe’s institutional investors, is but 1% of the Chinese sovereign wealth fund’s assets.