China Buys Wall Street

The subprime mortgage problem has now yielded a full-blown credit squeeze on Wall Street with securities firms' stock prices at fire-sale levels. The new fire-sale buyers are the so-called sovereign wealth funds, and China's are the most prominent.

With the world's largest trade surplus, China is accumulating foreign exchange reserves of about $1 billion per day. Rather than holding these reserves in low-paying Treasury securities, China recently created a new sovereign wealth fund--China Investment Company (CIC)--to invest these funds more profitably. Market participants, pay attention.

The West worries about whether these sovereign wealth fund investors will act like conventional rate-of-return focused investors or will have a different agenda in mind. Two points: First, if the sovereign wealth fund investors are rate-of-return motivated, they might have a much longer time horizon than the typical short-term-focused U.S. institutional investor. I am an optimist on this--increasingly disgusted during my many years in the investment world at the ever shorter term focus on stock prices. To me, anything that extends investors' time horizons would be positive, allowing companies to plan and act for the long run. Forbes