Cashed-up China set to hunt down more US bargains

by Benjamin Morgan 

   SHANGHAI, Dec 20, 2007 (AFP) - Fresh from a five-billion-dollar investment in Morgan Stanley, China's cashed-up government is set to go shopping for more bargains as it takes advantage of the financial turmoil in the United States.

   China's sovereign wealth fund created global headlines on Wednesday when it seized on Morgan Stanley's credit problems and grabbed a 9.9-percent stake in one of Wall Street's oldest and most storied investment firms.

   It was the second high-profile foray in the United States by the newly created China Investment Corporation, Beijing's 200-billion-dollar behemoth whose orders are to cruise global markets in search of sweet investment deals.

   "It wouldn't surprise me if there were more Chinese investments in financial institutions in the US," Paul Cavey, a Hong Kong-based economist with Macquarie Bank, told AFP.

   Aside from CIC, Cavey said that China in general would dramatically ramp up its global financial presence, given that currently the Asian nation accounts for only one percent of the world's total overseas investments.

   "You would expect (foreign direct investment) to rise at least five percent of the world total if not more," Cavey said.

   "You could easily see 200 billion dollars a year being invested overseas. That wouldn't all be in foreign direct investment. Some of them would be in portfolio investment, indices or bonds, but it's clearly a lot of money."

   CIC acted with exquisite timing on Morgan Stanley, according to Zhang Ming, from the China Academy of Social Sciences, who agreed that the fund would strike again as it took advantage of the credit crisis in the United States.

   "The US financial market is in turmoil right now and the resistance to sovereign wealth funds from the US government is diminishing as the financial organisations are in desperate need of money," the Beijing-based researcher said.

   In Morgan Stanley's case, it needed cash after it booked a 3.59-billion-dollar fourth-quarter loss due to its involvement in the subprime mortgage fiasco.

   CIC's counterparts in Singapore and the Middle East have also bought into large financial firms recently in similar circumstances.

   Given the cheapened cost of US assets, Zhang said it was the "best time" for China's financial organisations to acquire US assets.

   In the past Chinese firms have struggled to get a foothold in US companies amid national security fears in Washington that communist China would end up controlling key strategic assets.

   The highest profile example of this came in 2005, when state-run China National Offshore Oil Corporation's failed to take over Californian oil firm Unocal after US regulators voted down the deal.

   CIC raised some eyebrows in Washington in May when, four months prior to its official launch in September, it bought into US private equity group Blackstone for three billion dollars.

   When CIC launched, many analysts predicted it would be careful not to invest in politically sensitive areas such as the energy sector, but Cavey said this may now not be the case.

   "Energy and resources are very likely areas for CIC to buy into," he said, adding the entire world, and not just the United States, must be prepared for China.

   "Whether it's CIC or whether it's companies, the amount of money coming out of China is going to increase greatly over the next five years. I'm not sure whether the rest of the world is ready for that," he said.