Thursday, November 8, 2007

China Announces Plan for Investment Fund

Official: China's $200 Billion Investment Agency to Avoid Foreign Oil, Airline, Telecom Stocks.

China has announced the first strategic plans for its new US$200 billion investment fund, saying two-thirds of its funds will be invested in Chinese state banks and it will avoid buying into foreign oil, airline or telephone companies.

The comments by a Finance Ministry official, reported Thursday by state media, appeared to be aimed at easing potential foreign opposition to the fund. Critics have questioned whether such state-run funds will be used to promote government policy and whether they should be barred from investing in sensitive industries.

China Investment Corp. will invest "gradually and in a cautious way," Vice Finance Ministry Li Yong said at a conference in Beijing, according to newspapers and the Xinhua News Agency. "The CIC would not buy into overseas airlines, telecommunications or oil companies," Xinhua said, citing Li. It said he rejected "rumors that China would try to buy out European and American companies in large numbers."

An employee who answered the phone in the Finance Ministry press office said he could not confirm the report. He refused to give his name. A woman who answered the phone at the China Investment Corp. said no one was available to comment.

Beijing created the company, which overnight became one of the world's biggest investment funds, to pursue better returns on China's US$1.3 trillion (euro880 billion) in reserves. Most are now held in U.S. Treasury securities and other safe but low-return instruments.

One-third of the agency's money will be invested abroad, while another third will be used to buy Central Huijin, an agency that controls China's state-owned banks, according to Li.

The acquisition of Central Huijin could be very profitable, because China's banks are reporting double-digit increases in earnings amid an economic boom. The biggest, Industrial & Commercial Bank of China, says its profits in the latest quarter jumped 75 percent.

The remainder of the agency's money will be used to replenish the capital of the Agricultural Bank of China, a state-owned lender with a backlog of unpaid loans, and the China Development Bank, a noncommercial state agency, the reports said, citing Li.

Agricultural Bank's capital injection could clear the way for it to follow the lead of other major Chinese banks by selling shares to the public. That could turn the agency's stake into a valuable asset if the share price climbs as it has for other banks.

The agency also might make money on Development Bank if Beijing goes ahead with plans to turn the lender, which finances highways and other public works, into a commercial institution.

"Anybody who's been investing in banks from the outset of the reform process has made quite a return, whether foreign investors or the government," said Charlene Chu, an analyst in Beijing for the credit agency Fitch Ratings. "But I don't think ultimately that profit is what is driving the government here. This certainly is a broader desire to clean up the banking system."

Chinese companies have been uneasy about foreign acquisitions since the uproar in 2005 over state-owned oil company CNOOC Ltd.'s attempt to buy U.S. oil and gas producer Unocal Corp. CNOOC dropped its bid after American critics said it might endanger energy security.

The fund's first major deal was a US$3 billion purchase of a stake in the U.S. investment fund Blackstone Group LP.

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