Who is China Inc?

tauringhuang.

Lex

Thursday, August 07, 2008
  

  
Just
who is China Inc? The buyer feared by governments around the world – and revered by cash-strapped investment banks – comes in several guises, including state-controlled companies and a clutch of sovereign entities. Rather than being part of a carefully-choreographed strategy, however, sovereign buyers appear to be jostling for a piece of the action.

China Development Bank, the policy lender, entered the fray with the purchase of a $3bn stake in Barclays of the UK a year ago. Now it is reportedly sniffing around Dresdner Bank of Germany. CDB is the natural repository for banking assets, although China Investment Corporation may disagree. The sovereign wealth fund was established last year with a brief to enhance investment returns on a slug of foreign exchange reserves – a mandate it rather blew with its maiden investments in Blackstone and Morgan Stanley. Shares in the US financial firms have subsequently slumped, with Blackstone down 40 per cent since the June 2007 purchase. The third big sovereign buyer is the State Administration of Foreign Exchange (Safe), which operates under the central bank and owns small stakes in oil majors BP and Total of France. It recently agreed to put more than $2.5bn into a fund run by private equity firm TPG.

Happily for sellers, not all China's funds were created equal. CIC is effectively funded from foreign exchange reserves via bond issuance. It pays a coupon of around 4-5 per cent and bears currency risk on top. China Development Bank, which was recapitalised by CIC, paid a similar rate for its latest bond issue on Wednesday. CIC's initial kitty of $200bn looks big, but the bulk of that was spoken for at the outset. SAFE, by contrast, has lower funding costs and more cash: China accumulated almost $300bn of foreign exchange reserves in the first half of this year. The chances of Chinese funds competing against each other is remote, but not without precedence – state-owned oil majors have chafed over oil field assets. Either way, with this much money swilling around, the temptation to splash out will remain strong