CHINA’S secretive sovereign wealth funds will help its state-owned companies
to expand overseas in a shift of strategy after economic talks with America,
according to analysts in Shanghai.
The negotiations, led on the American side by Treasury secretary Henry
Paulson, ended with an agreement to open Chinese capital markets further to
institutional investors by reducing the “lockup” period for investments.
China’s aim is to secure reciprocal treatment to smooth the way for its own
companies to build up their foreign holdings.
Sovereign funds will assist inexperienced Chinese companies in financing,
foreign-exchange risk management and handling trade barriers.
This policy is designed to support institutions such as the state-owned China
Development Bank, which took a 3% stake in Barclays Bank last year and which
The Sunday Times reported last week was in talks to increase its
shareholding.
The funds are likely to become indirect owners of big stakes in troubled
financial institutions such as Lehman Brothers as they step up the pace of
investment abroad. They have now committed more than $5 billion (£2.5
billion) to private-equity firms that look for opportunities in the
financial sector. Chinese analysts expect the trend to accelerate.
There are signs that Beijing has given approval to a cautious risk-taking
strategy in the search for higher returns, aware of the political and trade
controversies that can accompany conspicuous investments by the Chinese
state in open, developed economies.
China is seeking to diversify its holdings of more than $1.7 trillion in
foreign-exchange reserves, which are mainly in US treasury bonds and other
fixed-income assets. It is the second-biggest foreign holder of US treasury
securities, with $490 billion, according to official figures from March.
Only Japan, with $600 billion, has more.
China’s latest move to diversify is a reported decision by the State
Administration of Foreign Exchange (Safe) to invest more than $2.5 billion
in a $17 billion fund set up by the American private-equity firm TPG Capital.
TPG recently agreed to buy a 23% stake in Bradford & Bingley for £179m
after the downturn in the housing market hit the mortgage lender’s profits.
It was Safe’s fifth known big investment outside China. It has taken stakes
in three Australian banks, invested $2 billion in BP and acquired a $2.5
billion holding in Total, the French oil giant.
A further clue to its investment strategy – officially a state secret – is its
stake of almost 1% in BHP Billiton, the Australian miner, worth some $2
billion.
Bankers and executives on the pilgrimage to Beijing in search of fresh capital
soon discover that little is known about the political factions or
decision-making at the top.
Chinese financial commentators have described a bureaucratic feud between the
finance ministry and the People’s Bank of China, the central bank, for
control of the world’s biggest foreign-currency holdings. The central bank
exercises control over Safe, although its reporting lines run to the state
council, China’s cabinet.
An analysis of Safe’s senior management based on official documents shows that
there is almost zero commercial experience in its upper ranks. Its top
administrator, Hu Xiaolian, is a rare example of a woman at the head of a
Chinese institution, but she is also a lifetime central banker who graduated
at the bank’s own university and rose to assistant governor.
Her subordinates include a former spokesman for the central bank, several
managers who served in provincial positions at Safe, and a senior executive
who previously occupied one of China’s slots at the International Monetary
Fund.
While many sovereign wealth funds are notable for their discretion, Safe is
completely opaque.
“When we asked about the investment in BP they didn’t give the barest answer,”
the financial magazine Caijing reported.
“People are unable to know about its investments and it has never published
its investment strategy.”
However, the magazine quoted a former official as saying the state council had
authorised spending 5% of the $1.7 trillion reserves on shares in foreign
companies.
“Why is Safe low-profile?” said Hu Naihong, a professor at Shanghai Financial
University.
“I think, first, because they don’t want to become the focus of public opinion
at home because these investments do carry risk; and second, because some
western countries are still scared of Chinese sovereign funds,” he said.
“The purchase of BP, however, met no resistance from the British government
and indicated that Britain welcomes Chinese capital. It is only a beginning
and I think Safe may increase its holding.”
It is apparent that the private-equity world holds considerable attractions
for publicity-averse investment managers in Beijing.
The smaller Chinese sovereign fund, China Investment Corporation (CIC), also
made two significant investments in the sector. It put more than $3 billion
into a private-equity fund set up by JC Flowers & Co, New York, aimed at
selective investment in financial institutions.
CIC’s managers hope it will do better than its ill-timed $3 billion investment
in the American private-equity firm Blackstone - just before a slide of
about 19% in the shares last year.
The fund came into being last year when China’s government sought to reconcile
the apparent turf battle among its officials with the establishment of CIC
as a new agency to manage $200 billion allocated from the reserves.
It appointed Lou Jinwei, 57, a former vice-minister of finance, to head CIC,
with a place on the state council in recognition of the importance of his
role. The state council exercises direct supervision over CIC’s management
and investments.
An official statement disclosed only that the fund would be “prudent” in
managing its foreign exchange and would accept “tolerable risks” in the
interests of maximising investment returns over the long term.
CIC’s funds exceed the $107 billion managed by Temasek, an investment arm of
the Singapore government, which is studied as a model by some Beijing
officials. China’s strategy, as a country of 1.3 billion people, is bound to
differ from that of Singapore, an island city-state dependent on global
trade.
The first signals of Chinese state investment overseas set off speculation
that a flood of cash would go into overseas stock markets in pursuit of
strategic stakes in oil, gas, minerals and other resources. In practice,
commitments from Beijing have been slower and more conservative, curbed by
political caution amid rivalries at home and suspicion abroad.
The Chinese public have not been shy of criticising the performance of state
funds and offering advice on the fairly free web-sites devoted to financial
affairs.
“So at last the government has started to come to its senses and realised it
should not have put all its eggs in the American basket,” wrote a web
commentator called Cat, “but now it’s too late and the dollar depreciation
has shrunk the value of our reserves by 15% to 20%.”
Another, called Chinaman, said they should invest more in euro-denominated
assets. “Even the Americans are trying to get out of the US dollar,” said
this sage of Shanghai. “Only the stupid Chinese government in the past five
years ploughed all our foreign exchange, paid for by the sweat of cheap
labour, into US dollars, saved it all in America and felt proud of itself.”
With stakeholders like that, it is little wonder that the bureaucrats at Safe
and the CIC are grateful that they need never face an annual meeting.
The Chinese government should use their investment fund to invest in the Chinese people. He should provide education and clean water and food to its people who effectively created the wealth. This would in turn give a better return then investment. eg higher skilled labour, lower social welfare cost
Sunny, london, uk
trust the Chinaman?
America is still the best and most dynamic market; there are booms and busts but it grows.
It is democratic, open society that accepts channelled migration. Mostly aspirational, hardworking and business oreintated people. Has technology and acumen not just consumers.
Goldfinger, Gloucester, UK