Bargains await cash-rich China

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By Chris O'Brien

BEIJING | When the world's economies bottom out, the most populous nation will be better poised than others to turn the financial implosion to its advantage, leading Chinese economists say.

China's financial institutions have been relatively unscathed by the meltdown. Laden with $1.8 trillion in foreign exchange reserves, they possess the spending power to splurge on bargain-price shares in the world´s crumbling banking and real estate giants.

A mood of caution appears to prevail, however, after two high-profile investments faltered last year.

The China Investment Corp. (CIC), a sovereign wealth fund set up a year ago with $200 billion in foreign exchange to invest, bought a $3 billion stake in Blackstone Group and $5 billion in Morgan Stanley, both of which are mired in the U.S. crisis.

The Chinese government's reluctance to wield its financial clout overseas would represent a missed opportunity to invest in some "grossly undervalued" companies, said Yao Shujie, an economics professor and head of the School of Contemporary Chinese Studies at Nottingham University in Britain.

"Investors are repressed by fear and a lack of confidence at the moment, and it is understandable individual investors don´t want to jeopardize their life savings. But China, as a country, has the ability to bear a large amount of risk. Now is the time to take risks," he said.

Mr. Yao is not advocating a wholesale purchase of Wall Street´s financial stocks. China lacks the experience and expertise to manage the likes of Goldman Sachs or Morgan Stanley, the remaining major investment banks.

Instead, he said, China should follow a strategy of "a billion dollars here, a billion dollars there," spreading risks over a diversified portfolio, and should consider board-level representation so Chinese bankers can learn new management techniques.

A week ago, Japanese banking giant Mitsubishi UFJ Financial completed a $9 billion deal to buy a 21 percent share in Morgan Stanley.

"If the Chinese government follows this kind of policy, then by the time this crisis is over, which in my view will be in one to two years, it could have made a huge profit from it," Mr. Yao said.