The name has finally been unveiled, but Fat Dragon is still awaiting the official launch of the China Investment Corporation (CIC), the mainland’s state investment agency.
That hasn’t stopped a bout of knickers-twisting from politicians in the West, who fear that CIC and other so-called “sovereign wealth funds” pose a threat to the international financial system.
What is the point of privatizing state enterprises at home, they wonder, if they are gobbled up by authoritarian governments in China or Russia? How should the Bundestag respond if, for example, CIC decides to take control of a German bank?
The US, France and Germany are reportedly drawing up rules to govern investments by state-controlled funds, while EU Trade Commissioner Peter Mandelson has suggested introducing “golden shares” in certain strategic companies to protect them from foreign state-controlled takeovers.
From Beijing’s point of view, however, establishing a national investment agency makes good sense. It represents an opportunity to generate bettter returns on the country’s US$1.3 trillion in foreign exchange reserves, which up to now have mostly been used to buy low-yield US Treasuries.
China cannot jettison all its US government paper because this flow of credit helps keep America’s interest rates low and its export consumption high. Therefore, CIC will start with US$200 billion and look at riskier but potentially more lucrative equities as well as stakes in strategic industries such as energy and natural resources – hence the outpouring of international concern.
After years of doing its best to stem capital outflows, Beijing is finally ready to hit the world’s financial markets with a great wall of liquidity.
This is not just about CIC or China Development Bank’s potential US$13 billion investment in Barclays bank. Under the Qualified Domestic Institutional Investor program, domestic banks, insurers, brokerages and fund managers are all investing in baskets of global equities and bonds.
JPMorgan’s conservative estimate is that if just 5% of China’s money leaves the country by 2020, this equates to a total outflow of US$885 billion.
However, as China turns from creditor to owner, it is sure to meet resistance.
Without substantial exchange rate reform, critics will increasingly accuse Beijing of buying foreign equity with the proceeds of currency manipulation. And if CIC fails to explain why it is investing in certain companies, it will be condemned as a shadowy operator of an authoritarian master.
China’s state investment agency is nothing new. Oil and other commodity exporters have operated sovereign wealth funds for years. Norway’s Government Pension Fund, which has stakes in many companies, is a model of investment probity.
The problem for China is that, like Russia, no one knows whether it can be trusted. The rule of thumb for CIC should be to buy small stakes in many different companies. It should also tell the world what it is doing.
CIC’s US$3 billion outlay on 9.9% of private equity firm Blackstone Group seemed an impressive start. That was until Blackstone’s share price fell by 20%, shaving US$425 million off the value of Beijing’s investment in just six weeks.
“The foreign reserves are the blood and sweat of the Chinese people. Please invest them with greater care!” wrote one enraged Chinese blogger.
Fat Dragon’s view? As Beijing invests its growing wealth, it may have more trouble with the nationalists at home than the protectionists abroad.