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  The Panda Takes on the Bulls and Bears: China Plays the Global Stock Market

The Panda Takes on the Bulls and Bears China Plays the Global Stock Market

By Wieland Wagner in Shanghai

Part 2: No Limits

Buying into Blackstone was just an initial experiment, says Beijing economist Li Yang, who does a substantial amount of consulting work for the new fund. Up until now China has only been on the receiving end of investments. Now it wants to begin exporting capital. He calls this an historic transition. It's also a perilous one: According to Li, the Chinese are afraid that the West could cordon off strategic industries from the new Asian investors. He insists that China has only peaceful intentions. "We opened up to the West," says Li. Now he says the time has come for the fourth largest economy in the world to play an important role on global financial markets.

There are virtually no limits to the imagination of Chinese investment strategists as they ponder what to do with their reserves. This immense wealth has been amassed partly from the profits of China's export industries, and partly because the People's Republic of China is still a far cry from a true market economy.

China's capital market is practically sealed. To ensure that things stay that way, the People's Bank of China -- the Chinese central bank -- does what it can to protect the Chinese currency from outside influences. Since the Chinese currency, the yuan, is coupled to the dollar, the bank constantly purchases large quantities of the US currency. This is the only way that it can artificially hold down the value of the yuan and maintain cheap Chinese exports.

Lou and his colleagues are certainly not about to change any of that, but the man is a reformer. He believes in the power of the market and that the state should earn high profits by investing its assets.

Lou's two associates also subscribe to these capitalist principles: Wang, who holds a doctorate in accounting and lived in the UK and the US and adopted the English first name "Jesse," and Xie, "The Iron Fist." Neither of them looks rich and powerful. Xie still occasionally drives a modest blue VW Bora through the streets of Beijing.

In actual fact, the trio controlled a holding with $60 billion in currency reserves before the fund was even launched. Beijing pumped this cash into the three largest state banks, wiped all their bad loans from the books, and paved the way for stock market floatations in Hong Kong. Now these once-ailing banks have joined the ranks of the world's leading financial institutions.

But will the CIC have a strong enough team that it can play ball and win on world markets? Chinese investors don't have a great record. Many of their previous market ventures look like wild gambling sprees. Three years ago, dealers working for China Aviation Oil in Singapore -- China's sole supplier of aviation fuel -- racked up losses of $500 million. They made miscalculations and were caught off-guard by rising oil prices.

Last year, news leaked out that the former head of the Communist Party in Shanghai and his subordinates had illegally siphoned off hundreds of millions of dollars from the state pension fund and channeled the money into projects run by corporate cronies. They acted as if they were investing their private salary in lottery tickets.

China may not have a free press, but the Chinese Internet community regularly vents its anger over how party bosses carelessly throw around money that actually belongs to the people. The masses were especially enraged over the Blackstone deal. Lou and his team lost money from the start: Shares in Blackstone took a tumble after the Chinese bought in.

There is widespread skepticism, even among Chinese party leaders, over the extent to which the country should get involved in high-risk investments, and this suspicion will probably grow. China's state-sponsored venture capitalists will need the expert knowledge of Western investment banks like Goldman Sachs and Morgan Stanley. Western investment consultants are already lining up for jobs and lucrative contracts with the new government fund in Beijing.

This is an embarrassing situation for many patriots. According to Cao Jianhai, an economist from the Chinese Academy of Social Sciences, the government has to question whether the fund's foreign managers will remain loyal to Chinese interests. "Or will they side with the US government or another authority when they decide on investments?" he asks.

Cao doesn't believe in capitalist games like the government investment fund. He is developing his own idea for how the country can use its currency reserves. It's a politically correct idea, at any rate: Cao is calling for the government to give the money back to the people. It was the Chinese after all who worked hard to earn this money, with low wages, rising prices, a growing gap between rich and poor, and a highly polluted environment. Cao's would at least be a truly communist approach.

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