As mentioned before and a keynote reminder in the news every hour since two days ago, Abu Dhabi's Investment Authority bailed out Citigroup with a $7.5 billion injection. But here's something new: China Investment Corp. (CIC), the Chinese central bank's investing arm, plans to invest some of its $1.46 trillion (largely gained from forex reserves) in capital markets heavily hit by the subprime crisis.
The CIC seeks to be a "stabilizing force for the financial markets". The fund has a long term goal of obtaining a 5% return, relying mostly on tradable securities in international markets. The size of worldwide sovereign funds will grow to $7.9 trillion by the end of this month, reports Merrill Lynch. The steady growth of sovereign funds means that there are institutional buyers of last resort who can save the financial markets. But these funds are not run by philanthropists; they will only invest where they see fit. So will they save us from the crisis?
Obviously, these sovereign funds seek to profit their shareholders, their country, but also its people and businesses. For example, the CIC said last month that they will spend only $65 billion in global investments and invest other remaining assets within the country, refinancing China's lenders. Moreover, the CIC is heavily invested (although not as high profile as international investments) in Hong Kong stocks, of which many companies directly deal in business with China. CIC will buy HK$780 million of China Railway Group Ltd., the world's third-biggest construction company in its IPO next month. Therefore, the CIC is directly contributing to the growth of its own economy, using money to make money.
Good idea? Very doubtful, since the Chinese know that the economy is at a state of near-overheating, why reinject the money back into the economy? Also, many state run companies are divesting their newly earned capital in overseas competitors and investments, such as reports that today Ping An Insurance (Group) Co. bought a 4.2 percent stake in Fortis, Belgium's biggest financial company, for $2.7 billion. Maybe the CIC should consider investing more in international capital markets to diversify their holdings and really stabilize the world economy. Until that day, I don't think that individual investors can always count on sovereign funds bailing out the financial markets, unless of course if you live in Abu Dhabi or China.
I am not so sure. The whole 1/3 international 2/3 domestic is basically what they "say". It is not like there's any law or anything that say they can or can't do. Therefore counting on CIC to do this or don't do that is probably not going to be very meaningful.
These sovereign wealth fund are the main weapons where the economic wars between commercial powers. There's great many other consideration for their action than simply maximizing returns. I wouldn't be surprised that one day these entities can serve as a super bank/investment/insurance for their country.
What is true though, is that CIC is given great autonomy to freely invest in whatever but ultimately when it matter it is going to serve China's strategic commercial interest. That much I'd count on.
Posted by: Falen | November 29, 2007 10:52 PM | Permalink to Comment