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  • China’s Entry into the New Trend of SWFs in International Financial Markets: A Japanese SWF is also under consideration

China’s Entry into the New Trend of SWFs in International Financial Markets: A Japanese SWF is also under consideration

|China

A fund to manage a nation’s financial assets called a Sovereign Wealth Fund (hereafter “SWF”) has been receiving much attention. Its distinctive feature is, alongside risk-taking, and active investment aiming at high returns, that its management line also appears to follow national strategy. Typical examples of SWFs were funds for making oil money a resource in the oil-producing countries of the Middle East or Singapore’s Temasek which manages financial assets, but in the first half of 2008 they were joined by Russia’s SWF, which aims to politically manage oil revenues. Prior to that, in the last half of 2007, China’s serious entry was expected. The foreign currency reserves held by China, as at the end of June 2007, became the world’s number one, overtaking Japan, at approximately 1.4 trillion dollars, and part of that will become efficiently managed financial assets.

In September 2007 China established the “China Investment Corporation” as an organization for implementing this management of financial assets. The size of the fund, at approximately 200 billion dollars, assured its suddenly becoming a major player in world financial markets. Previously, the Chinese government, concerning part of the approximately 200 billion dollars, issued special national bonds, raised funds from the People’s Bank of China (the central bank), and appropriated the capital for China Investment Corporation to be newly established. In addition, they also appear to have employed personnel from the major US securities firm Goldman Sachs.

Furthermore, in the first half of 2007, concerning the acquisition of Netherlands bank ABN Amro by the British bank Barclays, China, in concert with Temasek, as a provider of acquisition capital, lent support to the British bank Barclays. Targeting the energy resource rights held by British Gas (BG Group) in Kazakhstan, they made a capital injection into BG Group too, and are seen to be making “resource security”-related strategic national investments. In the future, bowing to the wishes of the Chinese government, a strengthening of investment into such things as finance for a pipeline into China from abroad is also conceivable. China will rank with the Western oil majors, and it can probably be assumed that global strategic investment will go on continuously developing.

Incidentally, Japan’s foreign currency reserves were approximately 900 billion dollars at the end of June 2007. Even if the annual import total within that of approximately 600–700 billion dollars is prioritized to safety and liquidity, it will probably be alright to divert 200–300 billion dollars as excess capital to investment that prioritizes profit-earning. Although not relevant here, active investment will probably be alright for drops in the investment yield of pensions and the improvement of the balance of payments of social welfare projects. In Australia the active investment of excess capital has been permitted from this year for the Australian SWF, to make up the deficit in pension funds.

Still further, in May this year, the 3-billion dollar stake made by China in Blackstone, the US investment fund, has demonstrated an influencing of cross-border mergers and acquisitions and the international flow of funds. The United States has a past background of rebuffing China National Offshore Oil Corporation’s acquisition of a stake in oil major Unocal several years ago, and is wary of China’s SWF. Japan should also take note. For example, in the case where a US fund, having China’s SWF as a major investor, has acquired a Japanese company, then the Japanese will be placed under the indirect control of China. The danger will heighten that Japanese companies, such as manufacturers with advanced technology, will be targets for acquisition. Prudence is called for in the deregulation that facilitates mergers and acquisitions.

[Translated by ERINA]