-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --
By Paul Taylor
NEWCASTLE, England, April 21 (Reuters) - Just when economists were predicting rising protectionism in Europe due to the financial crisis, the head of China's sovereign wealth fund says he is considering investing in the euro zone because the EU is now more welcoming.
Lou Jiwei's surprise message may be partly a veiled warning to the United States, where the China Investment Corp (CIC), has burned its fingers with big paper losses on its $3 billion stake in private equity firm Blackstone Group (BX.N) and $5 billion holding in Wall Street bank Morgan Stanley (MS.N). Chinese investment in U.S. companies has also faced Congressional hostility on national security grounds, thwarting a bid by the China National Oil Corporation for oil company Unocal in 2005.
If America doesn't treat us right, we'll take our money elsewhere, the CIC chairman seems to be saying. Lou may also feel European stocks are nearing the bottom, presenting buying opportunities, although he did not single out any sector.
Beijing has voiced concern about the financial stability of the United States and called for an alternative reserve currency to the dollar, in which the emerging giant has more than 60 percent of its reserves. Its U.S. equities purchases have been seen partly as a hedge against huge U.S. debt holdings, in the way that banks swap debt for equity in distressed borrowers.
CIC was created in 2007 to manage China's forex reserves for higher returns. The $200 billion fund achieved a 5 percent profit last year, according to a source close to the fund, which does not publish accounts. Much of that was earned by investing in Chinese banks, not abroad. China is underweight euros in trade-weighted terms, so it makes sense to diversify.
Lou's forthright comments also point up a shift in European attitudes to foreign sovereign wealth funds (SWF) that may be one positive side-effect of the crisis.
Recounting exchanges before the recession struck, he told an Asian business forum in Boao, China: "EU officials came to me and asked me to commit that my investment will not exceed 10 percent, or that I don't want voting rights. I said I could not accept that. Then they said Europe does not welcome me. I said that's fine, then I'm not going."
A year ago, the European Parliament and trade unions were baying for binding regulation of SWFs, particularly from Russia and China, fearing they would snap up corporate crown jewels, threaten European jobs and use their investments to apply political pressure. The European Commission resisted those calls, supporting a voluntary code of conduct for SWFs, which was agreed under International Monetary Fund auspices.
With Western bank lending drying up and recession biting, even the least transparent SWFs now look more of a saviour than a threat. Italy has welcomed the Libyan Investment Authority's stakes in number two bank UniCredit (CRDI.MI) and oil company Eni (ENI.MI), while Abu Dhabi's purchase of 9.1 percent of German car maker Daimler (DAIGn.DE) raised barely a murmur from trade unions or politicians.
"Of course there are many new changes this year," CIC's Lou said. "Europe is showing a welcoming attitude and did not mention those scrutinies any more."
Whether that new openness will stretch to a sovereign fund taking a controlling or a blocking stake in a European company remains to be seen. France has set a 20 billion euro state Strategic Investment Fund precisely to shield its companies from foreign "predators" during the crisis. And shareholders protested at a London meeting of mining group Rio Tinto (RIO.L) against plans for China's Chinalco to take up to 18 percent Anglo-Australian company.
With biting sarcasm, Lou said he was grateful to financial protectionists in Europe, who had saved CIC from terrible losses if the fund had invested in the euro zone last year.
Edited by David Evans