Hong Kong: As governments in West Asia take big stakes in American companies, China’s state-run investment fund has quietly shifted its focus from overseas deals to bolstering the country’s troubled banking system.
The fund, China Investment Corp., plans to spend roughly two-third of its $200 billion (Rs7.9 trillion) assisting Chinese banks, according to a person familiar with the company’s decision making.
In contrast to other sovereign wealth funds—like the Abu Dhabi Investment Authority, which invested $7.5 billion for a 4.9% stake in Citigroup Inc. this week—the Chinese have no immediate plans to take a large stake in any foreign company.
The remaining third of the fund, roughly $70 billion, that is not committed to shoring up banks with needed cash, has been parked in very short-term money market instruments, this person said, with the exception of two previously announced investments: a $3 billion stake in the Blackstone Group, taken in June, and a $100 million stake in the state-controlled China Railway Group, which plans to go public next month.
“We don’t have any more significant investment plans,” said the person knowledgeable about the fund, insisting on anonymity because the government tries to restrict public comment on its policies. Despite China’s keen interest in natural resource companies, the fund does not plan to bid for Rio Tinto or BHP Billiton, two primarily Australian mining companies currently sparring over a possible merger.
Though China Investment Corp. is still drafting a strategic plan, it intends to largelypursue a portfolio approach—making many small purchases of equities, bonds and other investments, rather than big-ticket acquisitions, the person familiar with the fund’s decision making said.
Some of the differences between the Chinese investment strategy and those of Arab region funds are a function of their relative size and experience. The Abu Dhabi Investment Authority, for example, started in 1976. It occupies its own skyscraper, with three trading floors and total square footage equivalent to a third of the Empire State Building. While many ruling families in the region relied on one or two investment advisers a generation ago, today their own, often Wall Street-trained sons and daughters invest their swelling oil profits.
By contrast, China Investment Corp. has only been active for six months. It has fewer than two dozen employees, mainly people who have transferred from China’s central bank and have little familiarity with equity investments. Indeed, it is seeking senior managers willing to move to Beijing to help it invest the nearly $70 billion it wants to commit to opportunities abroad.
The company did not consider a stake in Citigroup and is not looking to acquire distressed financial assets in the US, the person close to the fund said. It has ruled out investments in foreign airlines, telecommunications businesses and oil companies as potentially contentious.
Chinese officials remember the bitter opposition in Congress two years ago whenthe state-owned China National Offshore Oil Corp. sought to buy Unocal Corp. The effort failed amid wide American opposition. Such sensitivities have also led the fund to decide not to pursue overseas technology companies as a way of bringing advanced technologies to China. “That’s political, and we don’t do that,” the informant said.
To be sure, other state-run Chinese businesses continue to buy substantial holdings abroad. Last month, for instance, Citic Securities, a government-run investment bank, and Bear Stearns Cos Inc. announced that they would take $1 billion stakes in each other and set up a joint venture in Hong Kong.
But China Investment Corp., having generated headlines last spring with its Blackstone investment, and scrutiny from Washington faces powerful pressures to take a more cautious approach to overseas investing.
Concern has been growing in Western capitals about the rising influence of sovereign funds such as the Abu Dhabi Investment Authority, valued at $650 billion. Treasury secretary Henry M. Paulson Jr. and finance ministers of other leading economies called last month for these essentially government funds to make greater public disclosure.
China has been particularly eager to stay out of the limelight cast by overseasacquisitions as elections get closer in the US and officials at the European Union and in Washington grow increasingly critical of China’s rising trade surpluses. “There is some hesitation to make too much waves,” as well as a wariness of the declining dollar, said Victor Shih, a Chinese finance expert at Northwestern University. The dismal performance of China Investment in Blackstone has also encouraged a tepid approach.
The fund paid $29.605 a share for the private equity firm, just as credit markets began to turn against risky deals; it has since lost almost $1 billion of its $3 billion. Blackstone shares closed at $21.47 on Wednesday. The person close to the China investment fund defended the Blackstone purchase. “The decision to invest in Blackstone,” he said, “was cautious and focused on much longer-period returns and not about the share price over six months or a year—we do not worry about it.”
But the biggest source of pressure on the Chinese state fund lies in the continuing need to strengthen the chronically weak Chinese banking system as the economy continues to grow 11% a year.
©2007/The New YORK TIMES
Heather Timmons in New Delhi contributed to this story.