After Abu Dhabi Investment Authority, which made news last year for picking up a 4.9% stake in Citigroup for $7.5 billion, it is now the turn of the Chinese government owned Chinese Investment Corporation to get into the act.
Eager to cash in on the opportunity thrown up by the debt crisis the Chinese Investment Corporation has ploughed billions of dollars into the best known names on Wall Street. In control of almost $100 billion of China's huge forex reserves it has pumped in close to $5 billion into Morgan Stanley in a deal announced at the end of 2007. This means that China has ended up with almost as much as 9.9% of one of Wall Street's most powerful banks. This is the latest in a string of high profile investments made by the Chinese. The CIC already has a stake in the US private equity firm Blackstone and the Chinese Development Bank owns 3% of Barclays.
The deal only serves to highlight how things have changed over the last few moths, all due to the credit crunch. Two years ago a Chinese oil company wanted to buy the small US oil group Unocal. US politicians cutting across party lines asked that the plan be dropped and demanded that China open up its economy and protect intellectual property rights. Likewise when Dubai Ports World took over strategically important US ports last year, it kicked up a political storm which ended only when the bidder agreed to sell off the US ports.
Till now it was the US banks which were keen to acquire stakes in Chinese banks in a bid to gain a foothold in China to tap into the growing wealth of its population. Now it seems to be the other way round. China not only holds a stake in Barclays but also has a director on its board. Morgan Stanley for its part has made it clear that CIC will not have a representative on its board. This may well have been a condition imposed by the White House, one readily accepted by China after its Unocal experience.
Such investments by China in the capitalist world would have been unthinkable a few years back. Indeed there are many who view them with suspicion, as having been prompted by other than purely business considerations. The Chinese had clearly anticipated this problem and have constituted CIC as an independent company with its separate board of directors. They are at pains to point out that it is free from any state control whatsoever and argue that it is necessary to develop institutions to manage the $1.3 trillion worth of forex reserves they presently hold.
With its economy unaffected by the current financial crisis, the Chinese look set to follow the oil rich nations of the Middle East as big investors in the US economy. In a way it may be good for the global economy. Once the largest economies of the world are more closely interconnected and interdependent it would be less likely that any one of them would want to spoil the party.