$200 Billion to Invest, but in China
As governments in the Middle East 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, the China Investment Corporation, plans to spend roughly two-thirds of its $200 billion 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 percent stake in Citigroup 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 the China Investment Corporation is still drafting a strategic plan, it intends to largely pursue 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, the China Investment Corporation 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, the fund 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 China Investment Corporation did not consider a stake in Citigroup and is not looking to acquire distressed financial assets in the United States, the person close to the fund said, and 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 when the state-owned China National Offshore Oil Corporation sought to buy Unocal. The effort failed amid wide objections in the United States.
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 said they would take $1 billion stakes in each other and set up a joint venture in Hong Kong.
But China Investment Corporation, having generated headlines last spring with its Blackstone investment and come under 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 like 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 overseas acquisitions as elections get closer in the United States 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, setting off criticism even on Chinese Internet sites. 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 percent a year.
Chinese and Western bankers agree that banks in this country fall short of Western standards in assessing the creditworthiness of borrowers and in controlling fraud. Nonperforming loans as a percentage of total loans at Chinese commercial banks have dropped steeply, to 6.2 percent in September from 12.4 percent in March 2005, according to the China Banking Regulatory Commission. But this is mainly because banks have stepped up their lending, actually increasing their exposure to bad debt if the economy slows and recent borrowers default.
China Investment plans to inject roughly a third of its assets into the Agricultural Bank of China and the China Development Bank, two state-owned institutions preparing for initial public offerings in the next year or two. The exact amount of those investments has not been set and will depend on a continuing assessment of the extent of the banks’ nonperforming loans.
The fund plans to spend one-third more to buy the Central Huijin Investment Company from China’s central bank.
As the central bank has spent foreign currency reserves acquiring large stakes in the Bank of China, the Industrial and Commercial Bank of China and the China Construction Bank over the last three years, it has parked those stakes in the Central Huijin Investment Company. They will now be transferred to China Investment.
The person familiar with the dealings of the fund said the details of both transactions still had to be worked out. Another person with broad knowledge of Chinese financial policy making described the plans as “a done deal.”