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Forecasting a recovery in the ailing U.S. housing market, the Chinese government is set to a use a small portion of its massive sovereign wealth fund to invest in the American real estate market, according to Reuters.
China Investment Corp., which is thought to hold roughly $200 billion in assets, is planning on investing $2 billion in taxpayer-backed investment funds that will acquire toxic mortgage-backed securities as part of the government's Public-Private Investment Plan (PPIP), Reuters reports.
Apparently, the Chinese government feels that investing in PPIP is a much safer bet than the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF).
"In this case, CIC feels safer to invest and the safer it feels, the more confident it will naturally feel about its investments, as well as in the prospects for the U.S. economy," an anonymous source told Reuters.
Currently, the China Investment Corp. is in talks with nine companies that will gage its investments, including GE Capital Real Estate, Western Asset Management unit and Wellington Management Co LLP.
In addition into delving into the U.S. real estate market, China is also preparing to use a portion of its sovereign wealth fund to invest in Hollywood production houses, according to Reuters.
China"s sovereign wealth fund, like the vast majority of sovereign wealth funds around the world, was built on the back of America's out of control trade deficit.
Over the years nations - some hostile to U.S. interests - have been using petrodollars and profits from trade surplus with the U.S. to fill their coffers with enormous cash reserves to be used for the sole purpose of buying up U.S. assets and controlling strategic industries.
These sovereign wealth funds typically lack transparency and there is a growing fear that nations such as China, Venezuela, Japan, Iran and others could be amassing these huge funds, not to advance their own economic interests inside the U.S., which is detrimental enough to the American economy, but rather to advance political agendas. Some skeptics of sovereign wealth funds believe those cash reserves could easily be used to manipulate state-owned assets to disrupt the U.S. economy or to gain access to sensitive technology or simply monopolize all of America's manufacturing facilities.
These funds are growing exponentially. Due to their relative lack of transparency, it is hard to estimate the exact scope and size of some of the funds, however, The Brookings Institute estimates that there are over 40 sovereign wealth funds operating worldwide managing $1.9 trillion to $2.9 trillion worth of global assets. It is predicted that those funds could grow to $10 to $12 trillion by 2015.
Despite the enormous influence these funds have in the U.S., investing $40 billion in the U.S. in 2007 alone, very few of the people that should be asking the tough questions are, especially the Committee on Foreign Investment in the United States.
Since 1988 the organization has reviewed over 15,000 notifications of takeovers, acquisitions and mergers. Of those, the organization had launched just 25 investigations, and 13 of those foreign companies pulled-out after learning they would be subjected to a full investigation. Of the remaining 12, only one acquisition was stopped by the president at the time.
"It's time to start asking questions about these Wall Street investments," said Sen. Evan Bayh (D-Ind.), who testified last year before a bipartisan committee of analysts, researchers, and academics set up to examine U.S.-China economic and national security issues. "CFIUS has largely been a toothless watchdog."
China, with a massive sovereign wealth fund, has been using the global recession to acquire beleaguered companies and assets around the world - especially in America. Yet, when an American company attempts to buy a Chinese company, the deal is scuttled based on some arbitrary law or restriction, imposing virtual investment barriers that keep American companies, citizens or the government from owning majority stakes in Chinese companies.
On the other hand all of America is up for sale. From July 1978 to July 2008, America sold 16,613 of its best companies to foreign investors, allowing the profits and technological secrets in such industries to accrue to foreign owners. Moreover many of the key jobs (in research and development, for instance) go to foreign workers, while the profits go to foreign holding companies that boost the tax revenues of foreign governments.
Clearly, CFIUS needs to better scrutinize purchases of U.S. assets in the future, especially those by sovereign wealth funds. It should also demand more accountability and transparency in any sovereign wealth fund looking to invest in the U.S. to ensure that their motives are in no way nefarious economically, politically or socially.
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