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China's Government invests in US companies through CIC

Nick Doms's picture

The Chinese Government has diversified its foreign exchange reserves with the help of China Investment Corporation (CIC) and has recently divested portions of its European Government Bonds into other reserve currencies and focuses on increasing its direct investments in US Companies.

Both Xinhua, the Government controlled Chinese newspaper, and SAFE, China’s State Administration of Foreign Exchange, have denied the rumors. In an unusual move, SAFE issued a statement today, clarifying its reserve strategy, saying that there were no plans to review its current holdings of Eurobonds and that it views Europe as one of the most important regions for investing its reserves.

Anonymous sources, close to the CIC, did not directly confirm the rumor but went on record to state that both the Chinese Finance Ministry and SAFE had been reviewing China’s exposure to euro investments and had started to reduce such in light of the ongoing current financial crisis in the Eurozone.

The CIC has made direct investments in US companies since its inception in 2007 and has since acquired a substantial amount of interest in strategic US financial companies. Its working capital is conservatively estimated at around 350 billion dollars. The fund has been placed under the direct authority of Chinese Premier Wen Jiabao and Lou Jiwei acts as the Chairman and CEO of the China Investment Company. While neither the Chinese Government, nor the CIC disclose the reserve amounts available to them or how they are invested, it is with certainty that China has redirected its focus from investing in US Treasuries to seeking 5 to 10% direct ownership of US companies.

CIC already owns a 9.4% stake in the Blackstone Group since June 2007 and a 9.9% stake in Morgan Stanley since December 2007. Both holdings represent a direct investment of 8 billion dollars. The Chinese Government seeks to further diversify its direct or indirect investments by focusing on key components of the US economy, namely energy, information technology and defense.

US investment banks Goldman Sachs and Morgan Stanley are providing expert knowledge to the Chinese state-sponsored venture capitalists to pave the road to the future.

Market watchers try to predict what the impact would be if China were to systematically acquire significant holdings in sensitive US industries and where to draw the line between government policy and protectionism.

Written by Nick Doms © 2010, all rights reserved.

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