By Maria Bartiromo
In mid-September, panicked Britons pulled billions out of Northern Rock after it acknowledged it was caught in a global credit squeeze. Now a consortium led by Sir Richard Branson of Virgin is bidding for the troubled bank. Among the consortium's investors are canny American turnaround specialist Wilbur Ross and insurance giant AIG. One of the consortium's other investors is Victor Chu of First Eastern Investment Group. While he may not have the rock-star status of Branson, the rep of Ross, or the deep pockets of AIG, Chu is a major player in Hong Kong and a sharp observer of global trends. We talked on Oct. 22.
Northern Rock and other investments tainted by subprime seem pretty risky. Don't those risks worry you?
First of all, Northern Rock is only tainted by subprime in the context that the liquidity crisis is spilling over into Europe. Northern Rock itself, the main business, is not in the subprime borrowing business. It is really a plain-vanilla, middle-class U.K. mortgage business.
But it was pretty scary when we saw pictures of people making a run on the bank. Were they overreacting?
I think the U.K. government had not experienced this for 140 years. So it probably became slightly more panicky than it should have.
What is your role in the consortium, and what is it looking to achieve?
We are an investor, and we feel that this consortium, led by Richard, will have a formula that will achieve a win-win for everybody. We are looking at this as a 5- to 10-year investment. It's not a quick in-and-out type of situation.
How much capital does First Eastern have at its disposal?
First Eastern has over a billion and a half at its disposal, but our strength is we have big investors and institutions ready to co-invest with us whenever we can lead a deal. Our approach is buy in as opposed to buy out. We don't look at doing LBOs. We like to build alliances and strategic partnerships.
Do you get any capital from Beijing or the Red Army?
No, none at all. Ours is entirely international capital.
From the outside, you and Branson seem like an odd combination. Do you have a personal relationship with him?
No. My relationship in that deal is with Peter Norris, a longtime adviser to Richard. Peter's firm, Quayle Munro, is the adviser in the transaction, and that's why we're there. We have a lot of respect for Peter. I've known him for 20 years.
By all accounts, you are a master of guanxi, those personal connections so vital to doing business in China. Can outsiders ever hope to establish such relationships?
Maria, I think this is a worldwide phenomenon—not uniquely Chinese or Asian. All things being equal, you like to deal with people you know and can rely on. It's human nature.
Following the Northern Rock deal, are there any other opportunities in subprime?
[Laughs] Yes. You have hedge funds that have done very well, but some of them got caught and have to seek new investors.
What other industries offer good opportunities?
In China today there are already more than 400 million people who one can vaguely classify as middle class, and...this category is increasing by 30 million to 40 million every year. They will be looking for services that are much more high-level than they're used to. So services—whether financial services or leisure and lifestyle—these are the types of sectors we are now looking at very, very aggressively. Also environmental.
What is the impact of the U.S. housing market slowdown and tight credit environment around the world?
In Asia, and particularly in China, there is probably a 12- to 18-month window where we're still relatively robust because of the delayed reaction, so we can try to react to mitigate some of the impact. In this part of the world, there are very few asset-backed securities, particularly mortgage-backed securities. But the U.S. is still the biggest brother in the world. When the U.S. is down, the rest of the world feels it sooner or later.
It's interesting that you say there's an 18-month window. Today I spoke with Christine Lagarde, the Finance Minister of France, and she says it's about a two- to three-quarter delay before Europe takes a hit to economic growth. For a long time people have been saying: "The rest of the world doesn't have to catch a cold just because the U.S. slows down." But now I hear people saying the impact on the global economy may be inevitable.
Yes. Europe will feel it much quicker than Asia and China. But the weakness of the dollar is also a major concern here because our Hong Kong dollar is pegged to the U.S. dollar. And because of the way [China's yuan] is appreciating as the U.S. dollar continues to weaken, it will be very challenging whether we can keep the peg.
Do non-U.S. investors like yourself have the upper hand in deals in the wake of the U.S. credit crunch?
Upper hand is probably not the right word. I think that there are now more opportunities to create strategic alliances and partnerships that were difficult in the past. [One example] is the Bear Stearns-Citic Securities deal, which was announced yesterday. It's a strategic partnership that will give Citic Securities and Chinese investors exposure to U.S. investment banking deals they would not otherwise be able to develop themselves in an organic way. On the other hand, it will probably give Bear Stearns a fast track into China, where the investment banking sector is still fairly tightly controlled. So both sides will get a lot out of this deal, and the timing of the investment is interesting because of the weakness of the dollar and the liquidity crisis. The valuation of Bear Stearns is at a much more reasonable level than it was six months ago.
In August, Beijing announced a new program allowing mainland Chinese citizens to invest in the Hong Kong market. How important is this new liberalization for Chinese investors?
This is a precursor of a much wider program of allowing Chinese investors to invest on an international basis. The Chinese system is flooded with cash, as you know, but not all the cash is actually in the banks. In rural communities, a lot of people still keep cash under their pillows. Whatever the amount of bank deposits, the real cash is probably 30% to 40% higher. So China has a lot more liquidity than the domestic financial products can handle. Now [Beijing is] opening up what we call the "through train" to Hong Kong. The difficulty is there have to be guidelines and thresholds. Otherwise, Hong Kong will suddenly have hundreds of billions in cash coming in. That's why, since the Aug. 20 announcement of this plan, it hasn't been executed. We need a lot more time to think through the impact.
Alan Greenspan says the Chinese stock market is a bubble waiting to burst. Do you agree?
Fundamentally, yes. Because when you have companies trading at over 60 times earnings, it is not healthy.
Maria Bartiromo is the anchor of CNBC's Closing Bell.