Lou Jiwei, the head of China’s sovereign wealth fund, last night downplayed speculation that the $200bn fund would come to the rescue of other stricken US banks, following its investment in Morgan Stanley in December.
Lou, who is due to meet financiers on Wall Street today (Friday), said that China Investment Corp’s $5.7bn investment in Morgan Stanley had been opportunistic and not part of a calculated strategy to invest in the US financial sector.
He was speaking in Washington yesterday (Thursday), in an unscheduled discussion of CIC at the end of a meeting to launch a book he has edited.
Lou said that earlier in the day he had met US officials in Washington, not to talk about specific investments but more as a chance to get to know the US government on a friendly basis. Lou seemed pleased with the encounter, where officials had apparently been generally receptive to CIC.
At the meeting, Lou gave the clearest insight yet into CIC’s approach to investment. He addressed many topics of keen concern to Western policymakers and financial specialists, notably the widespread reluctance in the West to accept investment by sovereign wealth funds from emerging markets.
Lou fired a shot across the bows of states, especially in Europe, that are suspicious of SWFs. "If we find ourselves unwelcome or if we find people have misgivings about our investment, first we will try to make ourselves understood," he said, "and second, if even after we do that we still feel unwelcome in our investment destinations, we may choose to leave."
China Investment Corp was set up last year and little is known about it except that in June it bought a stake of just under 10% in Blackstone Group, the US private equity fund, for $3bn, and in December took a 9.9% stake in Morgan Stanley.
Chinese premier Wen Jiabao has made it clear two thirds of CIC’s investment would be in China. The fund has taken over the Central Hujin Investment Corp, a vehicle through which the People’s Bank of China held large stakes in Chinese banks.
On December 31, Central Hujin announced it would inject $20bn of capital into China Development Bank, one of the country’s big four banks, to aid its transition to a commercial bank and possible flotation.
"The purpose of our operation," Lou said yesterday, "is to reduce outstanding issues in [domestic] commercial banking reform.
"Although some of our banks have been reformed, assets remained on PBOC’s balance sheet. With the creation of CIC we bought assets from the PBOC and they have now become government holdings."
Free to hunt opportunities
But while taking over assets from the PBOC was clearly a central part of the original reason for setting up the CIC, Lou gave the impression that the fund would have considerable freedom in how it invested money overseas, and certainly that it had no preconceived ideas about where the best opportunities would arise.
Emphasising that the Morgan Stanley investment did not mean there would necessarily be more money for troubled financial institutions, Lou said: "We don’t want to put all our eggs in one basket, so we will keep our eyes open for other opportunities in other countries and sectors and regions. To me, the deal with Morgan Stanley was a window of opportunity. We should focus more on investment in other industries and other regions."
Lou said he did not know whether CIC would find similar opportunities in the financial sector.
But he hinted that CIC had considered other financial institutions before investing in Morgan Stanley. "Before our deal with Morgan Stanley we had discussions with a number of institutions," Lou said. "Among them Morgan Stanley was in the best shape. It may not be the fattest rabbit, however, its condition was the best."
Lou likened CIC’s investment approach to farming: sowing seeds and cultivating the land. But, referring to opportunistic deals, he said that: "If there is a big fat rabbit we will shoot it. I will continue to be a farmer, however I will keep a rifle at hand."
Lou said he had not seen any other fat rabbits yet.
He made it clear that Morgan Stanley had approached the CIC, but that after careful analysis the fund had realised this was a good opportunity, and so made the investment.
But in reference to deepening turmoil in the financial sector, Lou quipped that nevertheless: "Some will say we were shot by Morgan Stanley."
Not just seeking profits
Turning to CIC’s philosophy of investment, he dismissed suggestions that CIC cared only for its own profitability.
"We will not be 100% profit-driven. We will also fulfil our corporate social responsibility," Lou said. "That’s why we’ve been very interested in products related to the natural environment and cleaner energy. Although I smoke myself, we will not invest in the tobacco industry. We want to maintain a good public image for CIC."
Lou added: "Actually, I don’t need to generate such high returns. Five percent is the cost of funding and our long term target is a little bit higher than that. So I need to generate enough to cover our cost of funding."
He drew a contrast between CIC and other SWFs, "which have a different capital source" and whose "cost of capital is lower".
The CIC has been financed by $200bn equivalent of renminbi bonds issued by the Ministry of Finance, mainly to Agricultural Bank of China but also partly to the market. The ABC bonds were then sold to the PBOC, which is not allowed to fund the Ministry of Finance directly.
This enables the CIC to soak up some of the PBOC’s huge excess liquidity — a key purpose of CIC.
Lou said that CIC would ultimately resemble Singapore’s Government Investment Corp. GIC is regarded as one of the most secretive of the leading sovereign wealth funds. It has more than $100bn of assets and recently invested Sfr11bn in UBS and $6.8bn in Citigroup.
"People’s apprehensions are mainly about whether we operate on particular motives or not," he said, alluding to fears that SWFs might serve the interests of their political masters, to the potential detriment of the host countries of their investments.
Emphasising that the fund pays 5% interest on its capital, to cover the interest on the government bonds, he said: "I need to make money. If I don’t, I can’t survive. How can I have political motives?"
Taking a back seat
Lou even emphasised that CIC did not want to be an activist investor. "We voluntarily gave up voting power [in Morgan Stanley and Blackstone] and our investments are less than 10%," he said. "I don’t want to make trouble for anyone or myself."
Referring to Morgan Stanley, he said: "I think John Mack can do a better job than we can, so why not just let him do the job?"
Lou responded to Western observers who have been taken aback by the sheer size of CIC. "Ideally I would have liked to start with $2bn, grow gradually to $20bn and then in five years grow to $200bn," Lou said. "Getting so much at the beginning is not because we are ambitious. It was because of China’s macro policy needs."
He also made a case for CIC as a benign force in international markets. "We can play the role of a stabilising force in financial markets and our investments can bring jobs and stability, like other sovereign wealth funds," he said.
Lou acknowledged that the global credit crisis and mounting US economic woes posed a particular problem for China. "The market is very volatile and there’s a lot of uncertaity about the US economy, which has traditionally been the locomotive for the global economy," he said.
Under such circumstances, he said, "it will be difficult for me to make decisions and choices".
"No consensus" on disclosure
The International Monetary Fund has taken a lead recently in drawing up disclosure benchmarks for SWFs, responding to concerns in Western states that chunks of their blue chip companies could be bought up by sovereign funds which are often highly opaque in their operations.
Chinese officials were at the table during these discussions, which were led by Abu Dhabi Investment Authority and the Government Pension Fund of Norway.
But Lou said recent discussions among SWFs on international best practice had proved inconclusive. "Nobody wants to accept the fact that anybody is better than themselves, so there’s no consensus on best practice," he said.
Participants in that discussion failed to reach "mutual understanding" on definitions of transparency, national security and long term returns. "All these are very tough questions," Lou said.
When UK prime minister Gordon Brown was in China last week, Wen Jiabao held a press conference with him and tried to clarify some misconceptions about SWFs.
Wen set out three principles for the CIC: that it was for commercial purposes and sought risk-adjusted long term return; would be independent of political control, with its own governance structure; and would gradually improve transparency without compromising its commercial purpose.
Lou said yesterday: "We are now acting according to those three principles."
Fixed income managers sought
The fund is in the early stages of recruiting in-house investment professionals and engaging external fund management companies to run parts of its portfolio.
CIC has already advertised for external managers for long-only equity investment. "We plan to do that for fixed income investment as well," Lou said.
The unexpected discussion of CIC followed a panel discussion on fiscal reform in China, to mark the launch of Lou’s book, Public Finance in China.
Lou, who has never given an interview about CIC before, spoke for about an hour about the fund and answered questions, saying that this would be his only public statement on the wealth fund during his trip to the US.
Before Washington, Lou had been in California, where he met fellow investors from CalPERS and CalSTRS, the public sector pension funds.