Attracting Chinese investment getting tougher

Good article from Time about CIC.

Why China Won't Come to the Rescue
By Bill Powell / Shanghai

If once burned twice shy isn't an old Chinese proverb, it probably should be. As Gao Xiqing, the chief investment officer of China's $200 billion sovereign wealth fund, meets in New York this week with Morgan Stanley's CEO John Mack to discuss increasing the Chinese government's stake in the venerable — and flailing — investment bank, he bears an obvious burden. Last December, the CIC (the China Investment Corp.) invested $5 billion for a 9.9% stake in Morgan Stanley (for which the bank must pay CIC a 9% annual dividend until 2010.) On paper, that investment is now down more than 25%. Worse, Beijing paid $3 billion for a piece of the Blackstone Group just ahead of the private equity firm's initial public offering last June — an investment that occurred about a nano-second before the so-called sub-prime crisis began annihilating value on Wall Street and beyond. Fairly or not, the Blackstone stake has since become the symbol in China of a naive bunch of foreigners getting hooped by Wall Street sharpies. It's been the subject of withering public scorn in China, and has drawn pointed private criticism from the highest levels of the communist party, banking sources in Beijing and Hong Kong have said. The message: never again. All of which makes CIC's critics in China wonder why Gao, a soft-spoken graduate of Duke University's law school (class of '86), bothered to get on the plane.

The answer, if the recent behavior of other sovereign wealth funds and foreign private equity houses is any indication, may be to deliver, in person, a simple message: no. Not again, not unless you structure a deal in such a way that we simply cannot lose. If not, good-bye. That, in effect, is what Sameer Al Ansari, the CEO of Dubai International Capital, told Wall Street earlier this summer. He had had discussions "with all the people you'd expect" in the pantheon of U.S. finance about a possible investment from his fund, he told TIME. Wisely, it turns out, he told all of them no — and then set about on a tour of China to look at direct investments in companies that produce something other than toxic collateralized debt obligations. "There are a lot of other compelling places to look for investments these days," he said.

The decision not to invest a couple of months ago looks pretty smart today, and it's not clear, despite this week's carnage on Wall Street, that anything has changed significantly. To the extent that sovereign wealth funds are talking to desperate for capital bankers in the U.S. — and, as Gao's trip shows, they are talking — the terms of the discussions, one senior Hong Kong based banker said today, are likely to be very harsh for any potential recipient of capital: "You're basically looking at structuring a deal at this point in which there is no downside — none. Even if a company goes under, like Lehman, you're first in line to get paid a return on your assets. Take it or leave it."

That's more or less the deal secured by Temasek, a sovereign wealth fund in Singapore, when it invested in Merrill Lynch. It dumped $4.4 billion into Merrill last December at $48 per share, but a downside protection clause meant that the firm would make money even if the stock plunged to $24. It did — and then some. By late last week, Merrill traded at just over $17 a share, increasing the pressure on CEO John Thain to do a deal. Over the weekend, he sold the firm to Bank of America in an all-stock transaction worth about $29 per share for Merrill shareholders-which means Temasek could walk away with about a 20% return should it sell it shares. The Temasek deal last December, banking sources say, taught everyone in the region a lesson: if you're talking to Wall Street, drive as hard a bargain as you possibly can-or walk. They need you much more than you need them.

Now, moreover, even if valuations in the U.S. financial sector get more appealing should the market rout intensifies, there's another factor in play: governments in east Asia and the Gulf want their funds to help domestic companies, not foreigners. On Thursday, for example, Beijing's CIC announced that it would make investments in three of China's biggest commercial banks — Industrial and Commercial Bank of China, Bank of China and China Construction Bank — that themselves are getting hurt by an economic slowdown and a real estate slump at home. "This is a significant policy initiative aimed at supporting China's leading financial institutions at a time of global turmoil," says Jing Ulrich, Chairman of China Securities at JP Morgan in Hong Kong. It's another way of saying to CIC's Gao Xiqing, if you come home from New York having increased our stake in Morgan Stanley, it had better be the sweetest deal anyone in Beijing has ever seen.

SAFE gets into foreign investments

From the FT:

Chinese funds jostle to invest abroad
By Henny Sender in Hong Kong and Richard McGregor in Beijing

Published: April 4 2008 23:28 | Last updated: April 4 2008 23:28

Since its formation last September, China’s sovereign wealth fund, China Investment Corp (CIC), has been beset by suspicion and criticism abroad, and recriminations from officials and the public at home, over its investment decisions.



Suddenly, as it battles to establish itself as a credible global investor, CIC has found itself running into another, unforeseen, obstacle – a second Chinese state investment agency with even deeper pockets.



The State Administration of Foreign Exchange (SAFE) is both competing with CIC for investments and complicating the sovereign fund’s attempts to defuse criticism of the way it operates and makes investment decisions.



SAFE, which is under the central bank, has long conservatively managed China’s rapidly swelling foreign reserves, which stood at about $1,650bn (€1,050bn, £828bn) at the end of February.



For a long time, that meant investing largely in US Treasuries. Even now, about 70 per cent of its assets are in dollar bonds, say bankers.



But in recent months, SAFE has emerged as a powerful and more aggressive investor, chasing the kind of returns offshore that CIC was mandated to go after.



SAFE has built up a 1.6 per cent stake in the French oil firm, Total, worth about €1.8bn ($2.8bn, £1.4bn), the Financial Times revealed this week. It has bought stakes in Australian banks and considered investing in private equity funds.



Bankers familiar with its operations believe that it is also considering investing in international real estate.



The decision to make such investments is partly linked to concern over the declining value of the dollar, which reduces the domestic purchasing power of its Treasury holdings.



But increasingly, it raises the possibility of head-on competition between the two pools of sovereign funds, only one of which – CIC’s – is under any pressure to disclose its dealings.



SAFE has potentially far deeper pockets than CIC, which has only about $70bn to $80bn to invest directly at the moment. Moreover, the head of SAFE sits on the CIC board, with access to sensitive information about its planned investments.



For example, when the private equity firm TPG was marketing a multi-billion-dollar fund to invest in troubled US financial institutions, it first approached CIC. But CIC baulked at the terms and it decided to partner with JC Flowers instead, ultimately putting about $4bn into a fund developed by the financial investor. TPG then courted SAFE.



CIC has sought to tackle its critics head-on, conducting its business in a frank and straightforward manner. Lou Jiwei, its head, has toured global investment capitals to make his case.



By contrast, SAFE has a reputation for secrecy, whether its investments originate out of a Hong Kong subsidiary or a newly established office for alternative investments out of Beijing. Its secrecy complicates life for CIC, which is trying to be more transparent in response to concerns from governments that are suspicious of sovereign funds.



The sparring between the two comes at a time when many governments are debating whether it makes sense to have rival domestic investment bodies – a model that Dubai and Singapore have adopted – to spur better performance and impose more checks and balances.



The alternative is to have a single agency, as is the case with the Kuwait Investment Authority, currently a role model for best practice among sovereign funds.



Part of the jockeying between the two Chinese pools of money reflects institutional rivalry. SAFE is controlled by the People’s Bank of China, while the CIC has ministry status and is closer to the finance ministry.

Evidence of China as a responsible int'l stakeholder?

This demonstrates that at least one part of the PRC government wants to be viewed as a responsible stakeholder in the existing international order. Note that the foreign ministry's statement is at odds with that expressed by the sovereign fund itself. Stay tuned to see how this plays out.

China's foreign minister indicated yesterday that Beijing is willing to work on an international code of conduct for sovereign-wealth funds, showing a more flexible stance than was projected last week by a senior executive at China's sovereign-wealth fund.





"I believe that appropriately using sovereign-wealth funds based on international rules is beneficial to the concerned parties. The rules of the game, of course, ought to be set by all," Yang Jiechi said.

Blackstone Q4 loss crushes value of Chinese gov investment

The Chinese government invested $3 billion in Blackstone in May 2007. At the time, it looked like they were getting a deal by buying in at a 4.5% discount to the IPO price of $31. Since then, the price of BX has plummeted from a high of $35 in July 2007 to $14 today. While this is a long-term investment, the paper loss of more than $1.5 billion, in both absolute and relative terms, is breathtaking. Significantly, according the CEO, it is "unclear" when things will turn around.



Chinese bloggers were critical of this deal. Brace yourself for another firestorm of controversy.





From 3/10/2008 Seattle P-I:

Blackstone posts 4Q loss of $170 million



NEW YORK -- Private equity firm Blackstone Group LP said Monday it swung to a loss during the fourth quarter due to a write-down on its investment in bond insurer Financial Guaranty Insurance Co. and deterioration in the credit markets.



Blackstone, which went public in June, lost $170 million during the fourth quarter, compared with earnings of $1.18 billion during the final quarter in 2006.



Adjusted net income, which was adjusted for special revenues and expenses tied to the company's public offering, fell to $88 million, or 8 cents per share, from $808.1million, or 72 cents per share, during the year-ago period.



Blackstone Chief Executive Stephen Schwarzman said in a statement deterioration in the credit and fixed income markets during the second half of 2007 reduced the level of new investments, transaction fees and appreciation on Blackstone's portfolio of investments.



Schwarzman said those problems have continued into 2008 and it is unclear when conditions will improve.





Blackstone shares fell 3.6 percent to $14.05 in morning trading. The stock, which debuted last June at $31, touched an all-time low of $13.82 at one point in the session.