Investment firms need injection of global talent

PUBLISHED : Monday, 25 February, 2008, 12:00am
UPDATED : Monday, 25 February, 2008, 12:00am

Hardly a day goes by without us hearing about the mainland's new sovereign fund. The latest press speculation, which came over the weekend, is that the China Investment Corporation planned to buy as much as US$10 billion in Japanese stock and may consider purchasing a large stake in oil and gas developer Inpex Holdings.

For many people outside China, including leading politicians in Washington and Brussels, CIC has come to exemplify the growing importance of Beijing's economic might, leading to serious worries over its political motivation and lack of transparency.

At home, CIC has also become a target of frequent criticism, albeit for different reasons. So far, its two major overseas investments, totalling US$8 billion, have shown scant profit.

But the backlash against CIC has one benefit - it has contributed to a high-level central government debate which could prompt the revival of an experiment in which talent was recruited from outside the traditional school of party-trained cadres and technocrats.

Much has been written about CIC's ill-considered and ill-timed first overseas investment in the US hedge fund Blackstone. Last May, CIC invested US$3 billion for a stake of almost 10 per cent in the US private equity firm's public offering. Since then, Blackstone shares have declined more than 40 per cent, closing at US$15.72 on Friday. CIC bought shares at US$29.60. All told, the fund has suffered a paper loss of more than US$1 billion.

It goes without saying that the investment has become an albatross for the fund's managers because every time Blackstone shares plunge to a new low, state media dutifully blast CIC for making the investment and ponder what lessons need to be learned.

It also largely remains a mystery why CIC made the investment four months before it was formally established last September.

Although CIC officials are understandably reluctant to talk about it, reports have suggested the deal was cobbled together very quickly and that mainland officials did not even bother retaining a financial adviser to provide independent advice.

So when CIC decided to invest US$5 billion in Morgan Stanley for nearly a 10 per cent stake in December, some overseas media complimented CIC's managers for learning a lesson from the Blackstone debacle. Instead of buying Morgan Stanley's common shares, it agreed to buy bonds that will convert into equity in 2010 and carry a 9 per cent annual yield.

But under the terms revealed later, CIC has agreed to pay US$48.07 and US$57.684 for the shares, meaning if Morgan Stanley's shares traded below US$48.07, it would have to buy its shares at US$48.07. On Friday, Morgan Stanley shares closed at US$44.19. It does not look good for CIC even if the bond yield is counted.

By comparison, Temasek's investment in Merrill Lynch, made soon after the CIC investment in Morgan Stanley, appeared to have already made money, at least on paper. Singapore's Temasek, CIC's role model, agreed to buy the Merrill Lynch shares at US$48. They closed at US$53.05 on Friday.

Granted, fluctuations in share prices are normal and CIC's investments are for the long term, but the fact remains that CIC has hardly anything to show for splashing out US$8 billion, compared with Temasek.

There is no doubt that CIC's managers, including its chairman Lou Jiwei, a former deputy minister of finance, and Gao Xiqing, its general manager, are among the best and smartest technocrats the mainland leadership can find. But given the party's current rigid system of training and promoting bureaucrats, officials like these two are few and far between.

It is time the leadership considered hiring international talent and mainland bankers outside the party training system. Maybe CIC should consider hiring Antony Leung Kam-chung, Hong Kong's former financial secretary and now a senior managing director for Blackstone. He was credited with persuading CIC to buy the Blackstone stake.