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| World Marketplace |
Home Improvement
Charles W. Thurston
12/01/2007
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If it were so inclined, China
could infuse the global economy with $250 billion to $300 billion from its new
sovereign wealth fund (SWF)—one of the largest funds of its kind—by investing in
other nations, at a time when the world needs such liquidity. As the Asian
press has recently suggested, however, a more likely scenario is that the fund,
named China Investment Corp. (CIC), will instead be using much of its capital to
help the country’s own big blue chips acquire foreign companies.
Sovereign wealth funds are government-run investment pools
largely financed by a nation’s foreign exchange reserves. These reserves, often
built up to multibillion-dollar levels, are primarily acquired through oil or
other exports. The global reserves fueling these funds are worth roughly $5
trillion, up last year alone by $1 trillion. And they are growing by $2.5
billion a day, according to Stephen Jen, a Morgan Stanley SWF specialist in
London. A third of this growth takes place in China, he notes.
Many nations invest their sovereign wealth fund reserves to
great global benefit, says Lou Gerken, founder and CEO of the San
Francisco–based hedge fund group Gerken Capital Associates. He sees the past
year’s boom in investing by sovereign wealth funds as a good thing, at least for
some markets. "New investment by the SWFs in the emerging markets accelerates
the diversity of financial products available there and leads to greater overall
market transparency," says Gerken, who spent three decades entreating others to
invest in the emerging markets and who has built a portfolio now worth $1.4
billion, mostly through such investments. "So for the high-net-worth investor
contemplating whether to be more aggressive in investing in the emerging
markets, very large sovereign capital inflows are a very positive thing."
Market Manipulator
Unlike much of the rest of the world, China’s economy is
suffering from excess liquidity with no outlet. |
Yet the rush of sovereign capital inflows is also sparking
fears around the world about foreign ownership of strategic assets. Another challenge is the market momentum that a
fund can produce by making a large capital infusion. It seems logical that
SWF investment in a given sector or country will drive up market values. For
example, the U.S. subprime mortgage market grew with debt obligations held by
Asian investors who, to be sure, eventually got burned. A long-term SWF
investment could be the onset of a self-fulfilling prophecy for economic growth
by the investment target. Yet because SWFs will invest in good measure for
strategic reasons, price may not weigh too heavily in their investment
calculations, and thus could readily contribute to rapid volatility. Global
investors should watch for new pockets of seemingly inexplicable market and/or
economic activity.
"If the sovereign funds chase one particular sector, a bubble
could occur; and then they might sell their overvalued positions, so there could
be a recycling of assets on a global basis," says Richard Stone, the founder and
CEO of Salient Wealth Management in San Rafael, Calif. Stone has been watching
sovereign funds for 20 years, after being involved in a purchase, by Singapore,
of U.S. real estate. Secrecy notwithstanding, the money trail will be there. "If
you see sudden outperformance of some large-cap companies in the global arena,
that might be some indication of sovereign fund money going in," Stone says.
TOP VIEW
China could infuse as much as $300 billion into the global economy
through its new sovereign wealth fund. However, experts predict that the country
will continue to support its own blue-chip companies rather than invest in other
nations. That’s not all bad: Some countries fear that such outside investment,
especially in key industrial areas, could severely damage their security. |
But if a bubble fueled by China’s fund is on the immediate
horizon, it might be in China’s blue-chip companies, which already tend to rise
and fall with market frenzy. At the current rate of yuan appreciation, CIC
would need to get 5 percent returns on its foreign investments to achieve
adequate growth—returns that are not going to be easy to achieve with the global
economic slowdown. Instead, the fund reportedly plans to take equity stakes in
16 large state-owned companies, including oil giants Sinopec and China National
Petroleum, the big four state-owned banks, China Mobile and China Life
Insurance. The goal is not necessarily quick returns, but rather the
establishment of an indirect route to the rest of the world through corporate
mergers and acquisitions activity.
CIC does not appear to have any desire to lead the kind of
market reforms that would bring diverse investment products and liquidity into
China, except inasmuch as there is a general cry, from inside and outside China,
to let its own individual investors put their money into foreign markets. The
government has begun to experiment with that sort of reform; in August the
country’s currency regulator, the State Administration of Foreign Exchange,
announced a pilot plan to let Chinese citizens who have a Bank of China account
in Tianjin (a city the government wants to turn into a financial hub) invest in
Hong Kong–listed shares.
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