Chinese and Arab sovereign funds to the rescue

In December, Hong Kong woke up to blazing newspaper headlines that China has bought a nearly 10% stake in the number two US investment bank, Morgan Stanley.

It wasn't like any other acquisition; it spoke volumes of China's growing role in helping stabilise global financial markets still reeling from the US sub prime mortgage woes.

Not so long ago, it used to be that when Asian nations fall into a financial quagmire and send an SOS, the United States comes to the rescue.

In 1997, as the Indonesian and South Korean economies hovered toward bankruptcy, the decision to provide billions of dollars in bailout funds was made in the halls of the Clinton administration White House and the International Monetary Fund.

Today, the decisions made in the power halls of Asia move the markets as much. Asian nations fortified by more than a trillion dollars of foreign exchange reserves are helping support the future of the US banking industry and calm down troubled global markets.

In October, Chinese state-controlled Citic Securities invested US$1 billion in Bear Stearns.

In December, the Chinese government-owned China Investment Corporation injected US$5 billion in Morgan Stanley. The Singapore Government's Temasek Holdings bought 5.7% of Merrill Lynch, and the Government of Singapore Investment Corporation took a 10% stake in the Swiss bank, UBS. The equally deep-pocketed Abu Dhabi Investment Authority invested US$7.5 billion for a 5% stake in Citigroup.

Chinese sovereign funds and state-owned companies have gone on an international shopping spree in recent years, many such deals in the mining and energy sectors aimed at ensuring a steady supply of minerals and energy to sustain.

In the face of a weakening dollar, investments in the US would be a logical step for Chinese and Arab funds, which hold substantial US dollars derived from cheap exports and oil sales.

But in the past, foreign government stakes in US strategic sectors have triggered political opposition, especially if the government involved is considered an economic or political rival or perceived as security risk.

Only two years ago, Dubai Ports World's planned take over of shipping operations in six major US ports was railroaded on concerns that it would pose a national security risk. Four years ago, Chinese state-owned oil company CNOOC's bid to buy Unocal suffered the same fate.

In the din of the subprime crisis in the US, CIC and ADIA's stakes have sailed quietly and avoided controversy, suggesting perhaps that the seriousness of the sub prime problem outweighed alarmist and protectionist voices. Morgan Stanley officials said the CIC deal had been discussed with top US authorities.

In the end, this movement of capital is simply part the demand and supply cycle. Often excoriated for taking away jobs from American factory workers, China is using part of the proceeds from those cheap exports that left many American workers jobless to support American banks.

The only difference now is that China and Arab governments gained, in one form or another, some leverage in corporate America.

Heda Bayron is a Hong Kong based broadcaster and journalist. She has several years experience as a financial reporter covering Asian markets, and is currently a correspondent at the Pacific Bureau of Voice of Asia News.

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