The Financial Times reported today that China’s National Social Security Fund (NSSF) has held talks with three US private equity (PE) firms with a view to buying a stake of nearly 10% in one of them.
Given Beijing’s long-held ambition to boost outbound investment this is hardly surprising. China’s desire to increase capital outflows has gained momentum this year with China Investment Corp’s (CIC) investment in PE group Blackstone (See our July 2007 piece on it), CITIC Securities announcing a tie-up with Bear Stearns and ICBC moving in on both Seng Heng Bank of Macau and South Africa’s Standard Bank.
What is also unsurprising is the concern expressed in the West at the nature of some of these investments. Politicians and industrialists in the US and Europe may be coming around the the fact that the countries that have gobbled up all their forex are now trying to put it to constructive use; but the opaque management of the sometimes politically-motivated sovereign wealth funds doing the buying is proving a little harder to swallow.
So where does the NSSF come into this? CIC’s investment strategy may be a closely guarded secret but its ultimate aim – to realize greater returns on China’s foreign currency holdings, with half an eye on strategic resource purchases – is quite clear.
The NSSF is generally referred to as the lender of last resort for China’s wobbly social security network. But what is this “last resort”? Since it was founded in 2000, various theories have been put forward: it is a strategic reserve; it is to be spent in provinces where poverty is most prominent; it is for use once China’s demographics become so twisted that each worker will have to feed a string of elderly dependents; it is only there to support the pension system; it is a cash pile for welfare in general, including unemployment benefits, medical cover, and so on.
Will the NSSF do all these things? Will it do none of them? This fund has been given license to invest abroad, it has been allocated chunks of big-money IPOs, yet we don’t know exactly why it is there. Ultimately, this isn’t an issue for suspicious foreign trade partners. It is an issue for the Chinese people who are supposed, at some time and in some way, to rely on it for support.