State funds and banks lead China's hunt

China's National Council for Social Security Fund is an unlikely candidate to buy into US private equity groups, but the disclosure in Tuesday's Financial Times that it has held preliminary talks about buying stakes in companies such as Carlyle and Kohlberg Kravis Roberts underlines how dramatically China's global ambitions have grown.

The fund joins a number of large state institutions investing overseas, such as China Investment Corp, the newly-established sovereign fund, and China Development Bank, a specialist lender for infrastructure projects.

Industrial & Commercial Bank of China, the country's largest lender, last week struck a deal to pay $5.56bn for a stake in Standard Bank in South Africa, and Citic Securities recently bought into the troubled US firm Bear Stearns. Other big Chinese commercial banks are hunting for deals.

The sudden flood of overseas deals runs parallel with a wave of foreign equity investment by Chinese ­entities through mandates issued by the securities ­regulator.

Since September, $37bn (£17.9bn, EU25.6bn) in subscriptions has been received by four funds each approved to raise $16bn. JPMorgan says it expects Beijing to approve another $20bn by mid-December and a total of up to $90bn by the end of next year.

The broad framework allowing investment overseas has been laid down gradually by the central government in the last three years or so, with a variety of policy objectives in mind.

The portfolio investment is driven by a need to gain greater returns and spread risks away from the domestic market, as well as relieve the pressure on the financial system from huge capital inflows.

CDB, meanwhile, is heading overseas with a quite ­different mandate - to support Chinese investment in Africa and to test its ambitions to become a force in global development finance.

The drive offshore by China's big state banks, although under the wary eye of the regulators, is more driven by their commercial ambitions than acentral government plan.

"I don't really see [the banks] as being driven by the state pushing people out the door, overseas," said Jonathan Anderson, of UBS, in Hong Kong. "This is primarily being driven by the corporates themselves."

For deal-hungry global investment banks, the Chinese institutions they once chased for overseas stock market listings are now becoming valuable merger and acquisition clients.

"Chinese companies are being assiduously courted by dealmakers - and no wonder. They are cash-rich and the beneficiaries of a bull market," said Jing Ulrich, of JPMorgan, in Hong Kong.

However, one common challenge facing the Chinese institutions is the lack of global experience, both in investing overseas and running enterprises in foreign countries.

In the case of the social security fund, its most experienced global manager, Gao Xiqing, who has extensive experience on Wall St, has been shifted in recent months to a senior post at the sovereign fund.

The fund's talks with US firms surprised some market observers, who say they would not have expected it to tie up money in large, illiquid investments.

However, the fund might be being driven by a sense of competition with other Chinese state investors and may have pressed to be allowed access to similar investment opportunities.

For all the headlines, the wave of Chinese capital heading overseas is at an early stage and its impact on markets, perhaps aside from Hong Kong, is limited in terms of investments flows. "They are very small players at the moment," said Mr Anderson.

Politically and psychologically, however, the impact is much larger.

Background

Established in 2000, the National Council for Social Security Fund was part of China's strategy to fill the gaping holes left in its pension policies by the collapse of large swathes of state industry.

The NCSSF does not attempt to cover the entire country's pension needs, but is a kind of national pension fund of last resort, with no designated members eligible for benefits. It has assets Rmb460bn ($62bn, EU43bn, £30bn).

Much revenue came from the offshore initial public offerings of state companies, which had to put 10 per cent of money raised into the fund.