from Follow the Money

China’s sovereign economic development fund

June 20, 2008

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It looks like one of the CIC’s mandates it to support the outward expansion of Chinese firms, particularly in strategic sectors.

Via SWF Radar and the Wall Street Journal comes news that the CIC is interested in being a part of a consortium of Chinese steel firms bidding for a Brazilian iron ore mining company.

A consortium made up of Chinese steelmakers and China’s sovereign wealth fund is entering the initial round of bidding for a stake in the iron-ore unit of Brazil’s Companhia Siderurgica Nacional SA, people familiar with the situation said Thursday. The group’s interest, though preliminary, shows the importance China places on securing supplies of ore and other natural resources amid the current commodities boom .... CSN, one of Brazil’s leading producers of both steel and iron ore, has invited bids for all or part of Nacional Minerios SA, or Namisa, its unlisted iron-ore unit. Major Chinese producers including Baosteel Group Co., Shougang Group and Shagang Group, as well as China Investment Corp., a $200 billion investment pool run by the Chinese government, are interested in the unit, one person familiar with the matter said. But the final composition of the consortium isn’t finalized yet, this person said.

If this story is true, the debate over whether the CIC’s mandate includes supporting the outward expansion of Chinese firms would be settled.

On one level, it would be positive for the global economy if China’s balance of payments surplus financed deficits elsewhere in the emerging world -- not just deficits in the US and Europe. Redirecting some of China’s foreign asset growth away from the US and Europe could contribute to such an evolution, as would willingness on the part of those emerging economies receiving inflows from China to allow their currencies to appreciate. Brazil would use money borrowed from China to buy more US and European goods, helping the global economy to adjust.

On another level, it is a little hard to see how China can argue that the CIC is a purely commercial investor when it is actively supporting Chinese state firms. It is hard to see how a government fund that has to choose to finance the overseas ambitions of some Chinese companies and not others could be insulated from domestic political pressure. Moreover, the CIC is supporting one of the strategic goal of China’s state, namely helping -- in China’s view -- to secure a reliable supply of the mineral resources China’s economy needs. There is a fair debate over whether owning resources abroad truly is necessary to secure supply, or whether resources will always be available to the highest bidder. But China’s government seems to believe that greater Chinese ownership of mineral resources would help it navigate a world where China’s economy is much less self-sufficient than in the past. China only became a large net oil importer fairly recently.

Vertical integration is a common commercial strategy. But vertical integration supported by a government fund investment fund feels more like a scramble by states to secure access to strategic resources than pure commerce.

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