Once again Beijing’s shiny new “sovereign wealth fund,” China Investment Corp (CIC), has been making the headlines – only this time for the right reasons.
The news that it would pay US$5 billion for 9.9% of Morgan Stanley, a Wall Street bank bloodied after announcing nearly US$10 billion in write-downs related to subprime mortgages, transformed CIC from dreaded sovereign wealth fund pillaging international markets to financial savior.
For many people, the idea that China is now a big-time financial player rather than simply an export powerhouse, is still novel. Any reported investment made by the country’s “first” sovereign wealth fund is front page news.
Your correspondent’s arithmetic may not be his strongest suit, but a dragon needs to know how to manage his stash of gold. And by this dragon’s reckoning, China has about half a dozen sovereign funds managing, to varying degrees, the country’s own stash of gold – US$1.5 trillion and counting.
CIC’s investments may grab the headlines, but the State Administration of Foreign Exchange (SAFE) remains the primary manager of the nation’s foreign reserves and China’s biggest investor in foreign markets. For all the nervous whispers about China dumping its US dollar-denominated holdings, SAFE continues to invest the majority of the country’s forex in US Treasury bills. This has helped to push down US interest rates and prop up the country’s economy – essentially lending cash to US consumers to keep on buying Chinese goods.
SAFE is China’s biggest sovereign wealth fund by a country mile. It’s just that buying T-bills is not as sexy as grabbing stakes in big-name banks.
However, reports last month that an investment arm of SAFE had bought small equity stakes in at least three of Australia’s biggest banks suggest that the agency is ditching its conservative strategy. Although tiny compared to SAFE’s own monthly expenditure on government bonds, these investments are more in keeping with the behavior of a traditional sovereign wealth fund.
CIC is the upstart knave to SAFE’s king in China’s pack of financial playing cards. (The People’s Bank of China, which ultimately controls SAFE, remains the ace). But Beijing also has a number of useful, if lesser, players with which to gamble away the country’s small change.
Last year China Development Bank (CDB), one of Beijing’s three policy lenders, paid about US$3 billion for a 3.1% stake in Britain’s Barclays Bank. Although CDB says it is transforming itself into a genuinely commercial entity, some analysts pointed out that it could be positioning itself as an alternative state investment vehicle to CIC.
The China-Africa Development Fund, set up by CDB in June last year and earmarked to receive US$5 billion of state money, announced its first foray into the continent last month. Meanwhile, the Export-Import Bank of China, another state-financed policy bank, plans to finance projects in Africa, the Mekong Delta and the Pacific Islands.
Finally, towards the end of last year it was reported that China’s National Council for Social Security Fund – the national pension fund – had discussed buying stakes in US private equity firms Carlyle and Kohlberg Kravis Roberts.
CIC may be the poster boy for China’s sovereign wealth, but it is just one of several mainland funds hunting for foreign assets in which to plough the country’s vast store of foreign reserves. Expect to see China’s sovereign wealth funds bag more overseas prizes in 2008.