Discussion of Chinese investment in the United States usually focuses on U.S. government bonds held by China’s State Administration of Foreign Exchange (SAFE). While SAFE directs the majority of Chinese investment in the United States, including all China’s bond purchases, it plays very little role in non-bond investment. The China Investment Corporation (CIC) is the sovereign wealth fund responsible for allocating a portion of China’s foreign exchange reserves through non-bond investments. Indeed, CIC activities have accounted for more than 80% of Chinese non-bond investment in the U.S. since it was established in 2007.
As a sovereign wealth fund, CIC is a tool of the state and Americans have reason to be wary that its motives are not entirely commercial. CIC officers often attempt to discredit such claims. Last October, chairman Lou Jiwei dismissed the notion that CIC is pursuing anything beyond good returns. “What national strategy?” he asked. “Our strategy is long-term risk-adjusted returns.” Judging from the 13F form that CIC disclosed to the Securities and Exchange Commission in February and the Heritage Foundation’s China Global Investment Tracker, it appears that neither side is entirely correct. CIC certainly is a political as well as commercial instrument, but it does not aim to acquire strategic American assets nor gain substantial corporate influence in the U.S.
While CIC does own stock in iconic American companies like Apple, Coca-Cola, and Motorola, its shares in each are insignificant, worth less than $10 million. CIC has only made two first-time investments over $100 million in American companies since 2007: $100 million in Visa’s IPO and $1.58 billion in power company AES. All the rest of CIC’s large investments in the U.S. have gone into financial products, like $3.2 billion in a J.C. Flowers Fund in April, 2008 and two $600 million investments in distressed asset funds through Oaktree Capital and Goldman Sachs in September, 2009.
CIC is a prolific investor in Chinese companies, usually through Hong Kong-listed companies of mainland origin. Until recently, all of CIC’s large investments outside China and Hong Kong occurred in the U.S. and most were in the financial services sector. Since June, CIC has begun diversifying geographically. Of its 14 investments over $100 million in 2009, seven were made outside the U.S.. Most notably it paid $1.5 billion for a 17% stake in Teck Resources, a Canadian mining and minerals company.
Fears about China using CIC to achieve political goals in the U.S. seem unfounded. CIC bolstered the American financial sector when fresh capital was in short supply. And it has become a fairly conservative investor, choosing low-risk investments and diversifying into multiple sectors and countries. As Andrew Peaple put it in a recent Wall Street Journal article: “So much for the big bad wolf…. China Investment Corp. has revealed itself to be more like Little Red Riding Hood’s grandmother.”
Olivia Killeen is currently a member of the Young Leaders Program at the Heritage Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/about/departments/ylp.cfm
The rumblings of the dollar’s decline are louder than usual at the moment, tied to speculation that oil producing countries are seeking to move to a basket of currencies in oil pricing, rather than using the dollar alone. There are genuine developments behind such rumblings, mostly concerning American economic policy. But there are also reasons to believe the dollar has staying power, especially if U.S. errors can be fixed.
If Arab and other oil producers are indeed looking to move away from the dollar, they have cause. The Federal Reserve has been too free and easy for years, pumping too many dollars into the world economy. Like anything else, too many dollars means each one is worth less.
Looking down the road, deficit spending is set to make matters worse. Unnecessary deficits under the Bush Administration have given way to colossal deficits under the Obama administration, plus a free-for-all Congress that seems to be in charge of economic policy. When a government can’t control itself, its economic partners deduce they can’t trust the value of that country’s currency.
There’s still time, though, for the U.S. to bolster the dollar, both to preserve our international leadership and because the global use of the dollar is an economic advantage to our people and our country. Strangely enough, a major friend of dollar can be found across the Pacific, in China.
Notwithstanding the constant talk of the PRC’s rise, Chinese actions overwhelmingly serve to support the dollar. The RMB, a dollar alternative according to some, is as tightly pegged to the dollar as the Bahraini dinar. In their $2.1 trillion worth of reserves, the Chinese hold approximately three times as many dollars as all other currencies combined.
The Chinese weight on the dollar is even bigger than the hefty overall global weight. Twenty years ago, the IMF put the share of dollar at a bit over half of global foreign exchange reserves. At the end of June 2009, the level was closer to two-thirds.
So the dollar is still the world’s currency and will be for some time. To dispel the possibility of its decline, the U.S. needs better economic policy at home. A good start would be leadership and discipline in the Obama Administration’s next federal budget, two qualities that have been conspicuously absent to now.