China fund sees opportunity in global instability

SHANGHAI (Reuters) - Global economic instability has created huge investment opportunities for China Investment Corp (CIC), but the sovereign wealth fund will be careful not to destabilize countries where it operates, its head said on Friday.

CIC paid $5 billion in December for a stake in U.S. investment bank Morgan Stanley (MS.N) but has otherwise kept its powder dry as Western financial institutions have sought to replenish capital depleted by big subprime credit losses.

"The current international market turbulence has produced unprecedented investment opportunities," said Lou Jiwei, head of the $200 billion sovereign wealth fund, established last September to earn higher returns on part of China's vast official foreign currency reserves.

But Lou told a financial conference in Shanghai that CIC would not try to take advantage of the turbulence by acting as a hedge fund and betting on the performance of the economies of individual countries.

"In the 1990s, some hedge funds exploited defects in the macroeconomic policies of some emerging economies and attacked them, which damaged their economies and caused hardship for people," he said.

"CIC will certainly never do a similar thing."

The fund's officials have said as much as $90 billion of its initial allocation of $200 billion could be earmarked for investment overseas.

The rest is being spent domestically on strengthening the balance sheets of banks and other financial institutions.

CIC's maiden investment was a $3 billion pre-IPO stake in U.S. private equity giant Blackstone (BX.N), whose shares are down nearly 40 percent since they were floated last June.

LONG-TERM INVESTMENT

The losses have fanned fierce criticism of CIC within China, but Lou said Blackstone was a top-tier company in which the fund had invested for the long term. CIC would not be deterred by short-term swings in the share price.

"It's not like in the domestic market, where you invest today and you expect to double your return tomorrow," he said.

Lou confirmed that CIC bought into the recent IPO of credit card company Visa Inc (V.N) and said his fund had already started to invest in non-financial companies.

The only such stake to have been reported in the media is a $100 million investment in China Railway Group (0390.HK) (601390.SS) when it went public in Hong Kong.

Lou gave no details but said CIC would be a passive shareholder. It would not seek control of the companies it buys into because CIC is a commercially driven, not a politically motivated, investor.

He said he supported an initiative by the International Monetary Fund to draw up guidelines for the best practice of sovereign wealth funds, but he would not accept outside pressure for mandatory transparency rules.

"I have been a government official for decades, and I follow rules. But if you want something from me in addition to the existing rules, I can't lower my status to that level," he said.

The IMF and the Organization for Economic Cooperation and Development have drawn up guidelines for sovereign funds at the request of Western governments worried that the funds could be used to buy stakes in strategically sensitive industries.

Lou said best practice was subjective because there were five different categories of sovereign wealth funds, each of which operated along different lines.

"You can't say which one is the best," he said.

Moreover, CIC was relatively new to the game so should not be expected to set standards. "We are not going to be the leader. We are only half a year old. There are older brothers who are 30 years old. Let them be the leaders," he said.

(Reporting by Zhou Xin; Writing by Andrew Torchia and Alan Wheatley; Editing by Edmund Klamann)