China Should Step Up Investment in the U.S., Researcher Says

By Kim Kyoungwha and Belinda Cao

Sept. 23 (Bloomberg) -- China's investors should take advantage of a slump in U.S. asset valuations to invest in the world's largest economy, said Ding Zhijie, a former advisor to China Investment Corp., the nation's sovereign wealth fund.

The Standard & Poor's 500 Index fell to its lowest close in more than three years on Sept. 17, after Lehman Brothers Holdings Inc. announced the biggest bankruptcy on record. It's since rebounded 4.4 percent, paring this year's drop to 18 percent, after the U.S. government announced plans for a $700 billion bailout of the nation's banks and securities companies.

``It's a good time now for foreign investors including China to consider investments in the U.S.,'' Ding, deputy dean of finance at Beijing's University of International Business and Economics, said in an interview. ``The bubble on Wall Street has been deflated to a large extent.''

China Investment Corp., a state fund set up with $200 billion of currency reserves, last year spent more than $8 billion on stakes in Blackstone Group LP, manager of the world's largest buyout fund, and Morgan Stanley, the second-biggest U.S. securities firm. The investments are now valued at about 43 percent less than they were bought for.

U.S. Investments

China's government is seeking higher returns on its $1.8 trillion of reserves as a appreciating yuan erodes the local- currency value of those holdings.

Ding forecast the yuan, which has gained 7 percent this year, will strengthen to as much as 6.4 per dollar in a year's time. It earlier today touched 6.8099, the highest since a fixed exchange rate to the dollar was scrapped in July 2005, before trading at 6.8240 as of 3:07 p.m. in Shanghai.

``If we sell holdings in the U.S., it will bring about more losses, and losses on the book will turn into real ones,'' he said. ``A large-scale cut in dollar assets wouldn't be a wise choice.''

China Investment Corp. is in talks to buy as much as 49 percent of Morgan Stanley, a person familiar with the matter said last week. Treasury and agency bonds account for 50 percent and 40 percent respectively of China's total dollar assets held by the central bank, according to data from China International Capital Corp., the nation's first Sino-foreign investment bank.

China's government, which holds the majority of its $1.8 trillion in foreign-exchange reserves in U.S. Treasuries, should encourage Chinese companies and individuals to invest more heavily overseas, Ding said. To boost returns on the nation's $1.8 trillion currency reserves, the world's largest, more funds should be invested in emerging markets, he advised.

Chinese oil firms are seeking to buy energy assets overseas to meet rising demand at home, where economic growth has exceeded 10 percent for 10 straight quarters.

``From a long-term perspective, China should avoid concentrating its overseas investments in the U.S. and Europe,'' Ding said. ``We need to diversify the risks into more global markets including Asia and Africa.''

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net. Belinda Cao in Beijing at lcao4@bloomberg.net.