Blowups Aside, China Is Doing Well As a Money Manager

October 16, 2008
Rick Carew

Quick: Is China the "dumb money" or the "smart money?"

China's sovereign wealth fund and some of its financial firms have taken big hits on their high-profile overseas investments in companies like Morgan Stanley, Blackstone Group and Barclays.

Those losses have attracted some tough criticism, and no doubt made regulators wary of greenlighting other efforts to bargain-hunt among the wreckage of Wall Street and the City.

The reality is that those high-profile troubled investments total only a bit over $10 billion. That's about 0.5% of the country's $1.9 trillion in foreign exchange reserves.

Much of the rest of that -- which economists put at 60% to 70% -- is in U.S. Treasurys, agency debt, and corporate bonds. Those holdings, especially U.S. Treasurys, have done well as a flight to quality makes them more attractive than equities or less well secured debt.

Even the problems at Fannie Mae and Freddie Mac haven't hurt China as the U.S. rescue plan leaves bondholders whole.

So, high-profile blowups aside, the fact is that China has done very well over the past year managing its money.

Where China went right is in staying away from the momentum investing of the past few years. That's kept the country's nest egg safe -- even as the country's forex safeguard, the State Administration of Foreign Exchange, put small amounts of money into more risky investments like private equity funds and blue-chip stocks.

The country's sovereign wealth fund, China Investment Corp., has less than $100 billion allocated for overseas deals and has become increasingly gun-shy about pulling the trigger as its investments in Morgan Stanley and Blackstone soured.

Outsiders may gloat over those ill-timed moves. But in truth, among the world's biggest investors, China may turn out to have been the smartest money of all.