China Investment Corp allays fears on role in world markets

PUBLISHED : Friday, 30 November, 2007, 12:00am
UPDATED : Friday, 30 November, 2007, 12:00am

Beijing's US$200 billion sovereign fund will be a stabilising force rather than a threat to the world's markets as it was created for the country's need to soak up excess liquidity, according to the head of the fund.

China Investment Corp, which was established on September 29, has aroused concern from commentators in the United States and Europe who view the growing might of state-backed funds as a threat to the international financial system.

'These concerns are fully justified and understandable,' CIC chairman Lou Jiwei said.

But he pointed to recent capital injections by sovereign wealth funds into banks rocked by the subprime mortgage crisis as evidence of the positive role they could play.

Abu Dhabi's sovereign wealth fund injected US$7.5 billion into Citigroup this week in return for a 4.9 per cent stake, helping to shore up the US bank's balance sheet after losses reached US$6.8 billion in the third quarter.

'These funds are not investing for the public good but from a long-term investment perspective. They are stabilising the market. CIC will do the same,' Mr Lou said.

He said CIC was set up to help ease pressure on rising liquidity on the mainland.

The mainland's foreign exchange reserves, the world's largest, rose to US$1.45 trillion at the end of last month from about US$1.43 trillion in September, according to Zhang Xiaoqiang, a vice-director of the National Development and Reform Commission, the country's economic planning agency.

In the most detailed account yet of CIC's intentions, Mr Lou said the company would focus on investing in publicly traded financial products but also seek direct equity stakes in companies at home and abroad.

CIC plans to set up an international consultative committee and employ foreign managers. Eventually, it will open branches in financial centres around the world.

Only about 33 per cent of CIC's initial US$200 billion stockpile will be invested overseas. Its only known investment so far is a US$3 billion stake in US private equity firm Blackstone Group. It is also expected to buy US$100 million worth shares during China Railway Group's initial public offering in Hong Kong.

The remainder of its cash will be used domestically to buy Central Huijin, the central bank's investment arm, and to recapitalise China Development Bank and the Agricultural Bank of China.

Although the Blackstone deal aroused little protest in the US, the Congress is reportedly working to govern investments by sovereign funds. Earlier this year, European Union trade commissioner Peter Mandelson also suggested introducing 'golden shares' to protect strategic companies from foreign state-controlled takeovers.