China sees opportunity in US recession
By Antoaneta Bezlova

BEIJING - Chinese pundits continue to fret about the gloom and doom scenarios that an imminent United States economic recession might have in store for China's surging economy, but some are beginning to see a silver lining in it too.

"If it was not for the subprime mortgage crisis, China could not have dreamed of pumping money into top Wall Street financial institutions," legal expert Zhu Yiwei wrote in an opinion piece in the Southern Weekend. "But now that China has acquired a 10% stake in Morgan Stanley, there is hope that, through building a network of personal connections on Wall Street, we can work to reduce trade frictions between the two countries."

Indeed, China's infusion of US$5 billion into the financial titan Morgan Stanley in December to help rebuild its capital base has been portrayed by some experts as a successful inroad into the Wall Street fortress that should be used by Beijing to acquire more power to influence opinions in US political backrooms.

The investment in Morgan Stanley is the latest in a series of prominent deal-making abroad the country's new $200 billion sovereign wealth fund - the China Investment Corporation (CIC) - has completed since its inception in May. Both its creation and activities have created a buzz in global financial markets in anticipation that a sizeable sum of money will be channeled into global assets.

But the fund has also raised political hackles in some countries for fear that its masters may exploit the openness of developed countries to international capital to seek strategic dominance of key resources and infrastructure and further their national foreign-policy objectives.

China's investment fund is only the latest newcomer among sovereign wealth institutions that have proliferated in recent years in countries that produce oil or have built up large currency reserves through surging exports. These funds at present control between $2 trillion and $3 trillion; experts predict that their assets will swell to more than $10 trillion within a decade.

Fears that such assets will be used to take over key domestic industries in the US and Europe have prompted officials from the Group of Seven leading nations to call for clear rules on sovereign wealth funds. The International Monetary Fund has also been called on to help design codes of conduct for them.

In China, the reaction to such fears has sometimes been unabashedly nationalistic. "The excessive interest in China Investment Corp is a reflection of the heating global competition between major world powers," said a recent editorial piece in the China Times.

"It is pointless for an investment firm from a country like China to attempt and hide its aspirations, pretending its goals are entirely market-driven. CIC is a sovereign wealth fund of a big power and should use the available market mechanisms to fulfill the country's strategic needs," the article went on. "Purchases of strategic foreign assets and much-needed natural resources should be on top of its agenda."

Ironically, these opinions have appeared at a time when Chinese leaders are at pains to emphasize the political independence of the country's new investment vehicle. "This investment company is entirely commercial," Premier Wen Jiabao said at a joint news conference with visiting British Prime Minister Gordon Brown last weekend. CIC's external activities "must not be politicized", Wen said, adding, "The government doesn't meddle."

Chinese policy-makers remember well the setback the country's third-largest state-run oil company, the Chinese National Offshore Oil Corporation, encountered in the US when it tried to acquire California's energy company Unocal in 2005. The political backlash that ensued showed the suspicions and hurdles awaiting other potential Chinese attempts to acquire large companies in major developed countries.

Nevertheless, the opportunities presented to investors by America's sinking financial fortunes have been difficult to resist. Big losses from bad loans tied to the battered US housing market have forced top investment banks such as Merrill Lynch and Citigroup Inc to look for help from overseas investors as far afield as China, South Korea, Singapore and Saudi Arabia.

After pumping money into Morgan Stanley in December, Beijing eventually decided to reject a proposed multibillion-dollar investment in Citigroup by the state-owned China Development Bank last week, inviting speculation that Chinese leaders have chosen to maintain a low profile for their investment targets. Neither China Development Bank nor Citigroup has commented on the reasons behind the last-minute rejection of a plan that had been in the works for weeks.

Some Chinese experts suggest the decision may have to do with Beijing's reluctance to clinch another high-risk deal at a time when public criticism that its previous investments in Blackstone Group LP and Barclays Plc have fared poorly is rife.

"We still haven't seen the end of the subprime crisis and this is perhaps not the best time to invest in Wall Street," says Ding Zhijie, professor of finance at the Beijing University of Foreign Trade and Economics. "The fear is that intense competition between Asian investors may push many to enter that market prematurely and pay a high price for it."

Other experts argue that China should seize the opportunity and invest in resource-rich developing countries with fewer regulatory hurdles compared to the West. "CIC should set its targets on emerging markets where there is a lack of capital and they are looking to attract strategic investors," says Zhang Ming, an economist with the Chinese Academy of Social Sciences. "It is only a matter of time before protectionist sentiments arise there too."

All seem to agree that the establishment of the sovereign wealth fund marks only the beginning of a high time for Chinese investments overseas.

Under pressure to reduce China's gaping trade surplus and ease appreciation pressure on its currency, Beijing has relaxed many rules about overseas investments and Chinese companies and individuals have been spending big on acquiring assets and stocks abroad.

Flush with cash from recent flotations on the stock markets, Chinese commercial banks have been busily acquiring stakes in foreign banks to expand their international presence. Chinese companies for their part have been encouraged to look aggressively to purchase long-term supplies of energy resources and raw materials.

If the current trend continues, overall Chinese institutional and private investments in 2008 may well exceed $250 billion, or nearly double the $134 billion China poured into overseas investment in 2006, said the Beijing Youth Daily.

(Inter Press Service)

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whatever, China brought it upon themselves. They kept the U.S. dollar strong by buying American securities. Why? So they could continue to export goods to us. They played with the natural ebb and flow of economics and now they might get burned. The dollar is crashing hard because it has too, this recession should have happened a long time ago.

In all honesty, I think it's going to be a good thing for America. Our export ability will once again become competitive in a free-trade market. Having things go both ways is kinda fundamental if the system is going to sustain itself, China milked it's position long enough. Time to pay the piper.

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