China's Strategy of Overseas Sovereign Investment Taking Shape

China is accelerating the pace of capital export. A series of overseas acquisitions shows that the portfolio investment strategy of an increasingly complex and flexible sovereign wealth fund and of large national enterprises is taking shape. China is adapting itself to different environments and is learning to manage its risk. It is showing patience in adopting different strategies for different regions, assets and political risks, and even different geo-political environments.

This year, China’s overseas acquisitions relying on foreign exchange reserves are going industrial. China Investment Corporation has concentrated on the financial field and its investments in Blackstone and MorganStanley have aroused much controversy. The Industrial and Commercial Bank of China has made it clear that for the moment it will take no interest in acquiring financial assets. This year, some national enterprises under State-owned Assets Supervision & Administration Commission have advocated that China's foreign reserve should be invested in industrial and strategic resources.

China's sovereign overseas assets acquisition strategy, based on huge foreign exchange reserves, is following a pattern:

-- Undertaking major strategic development and acquisitions, mainly in energy and resource projects and infrastructure construction, in developing countries, particularly in Africa and East Asia, servicing economic integration of China with surrounding areas.

 ---M&A in western countries (outside the US) in cooperation with western multinationals. These mergers and acquisitions play a significant role in upgrading China's industrial and strategic positions in global competition. An example is the joint stake taken by the Aluminum Corporation of China with ALCOA in Australian mining giant Rio Tinto.

--- Acquiring shares of large multinational companies in a low profile and small-scale way, aiming at financial returns. For instance, China’s State Administration of Foreign Exchange became a shareholder in gas and oil mega-corporation Total and acquired a 1% stake in BP.  No longer optimistic about buying into financial assets, China's foreign exchange reserve acquisitions in the open market are turning to energy and resource companies, particularly in oil and gas.

---Undertaking mergers and acquisitions through limited partnership, sovereign wealth funds or state-owned financial institutions, establishing new private equity fund with large overseas private equity fund, particularly in financial assets, in which China lacks experience. For example, cooperation between CIC the JC Flowers is attracting attention.

---Capital injections into the China Development Bank or industrial funds by the foreign exchange reserves. This will indirectly help national enterprises undertake overseas acquisitions.

---Investing in the United States, mainly undertaken through third-party trust management. Hundreds of billions of dollars of Chinese funds are entrusted to Wall Street. The acquisition of shares of a US multinational company by a foreign enterprise is influenced by politics, and success depends on whether it can cooperate with local professional bodies to manage political risk.