Sunday, October 12, 2008

China's CIC May Have $5.4 Billion Frozen in Money-Market Fund

By Miles Weiss and Belinda Cao

Oct. 13 (Bloomberg) -- China Investment Corp., the sovereign wealth fund that bought stakes in Morgan Stanley and Blackstone Group LP before their stocks plunged, may have as much as $5.4 billion frozen in a U.S. money-market account.

Stable Investment Corp., an affiliate of Beijing-based CIC, was the largest shareholder in Reserve Primary Fund on Sept. 1, according to regulatory filings. Reserve Primary suspended withdrawals last month after becoming the first U.S. money- market fund in 14 years to leave investors with losses. Stable Investment had about $6 billion in additional U.S. money-market funds earlier this year.

``I don't think anyone in China can claim a lack of experience in what can go wrong with a money-market fund,'' said Michael McCormack, executive director of Shanghai-based Z-Ben Advisors Ltd., adding that several domestic funds needed cash injections in 2006 to offset losses. ``I'm a little surprised that CIC would be invested in any money-market fund that carried a hint of risk.''

China, which has primarily held its $1.8 trillion in currency reserves in low-yielding U.S. government debt, set up CIC last year to put about $200 billion into assets with higher rates of return, such as stocks and corporate bonds. It invested $5 billion in Morgan Stanley, the second-biggest U.S. investment bank, and $3 billion in buyout firm Blackstone, manager of the largest leveraged buyout fund. Both New York-based companies have lost more than 70 percent of their market value since the purchases.

Parking Cash

CIC devoted most of its money to domestic banks, and has about $35 billion remaining for global investments, according to McCormack at Z-Ben, which consults on the China's money- management industry. The fund had placed $11 billion in U.S. money-market funds, according to filings with the U.S. Securities and Exchange Commission. It may be using the money funds to park cash until selecting outside money managers to help it invest, said Brad Setser, a fellow for geoeconomics at the Council on Foreign Relations, a New York-based think tank.

``It has taken them awhile to figure out what they want to invest in,'' Setser said. ``In a context where the global market has slid, there hasn't been a lot of pressure to invest quickly.''

Depending on its performance, CIC may be allocated as much as $1 trillion of China's foreign exchange reserves, according to Michael Martin, an Asian trade and finance analyst at the U.S. Congressional Research Service in Washington.

Stable Investment is an affiliate of CIC, said two people with knowledge of CIC. Both companies occupy the same floor of the New Poly Plaza in Beijing. The Stable Investment contacts listed in SEC filings -- Jiang Xiaoyun and Wang Rong -- work in CIC's finance department, these people said.

Wang, reached by telephone at her office, declined to comment.

Invesco, JPMorgan Funds

A Sept. 29 SEC filing shows that Stable Investment held 11.1 percent of Reserve Primary's institutional shares at the beginning of the month. Based on the 48.9 billion institutional shares outstanding as of May 31, the most recent information available, Stable Investment's stake would have totaled about $5.4 billion.

Stable Investment has also invested roughly $5.9 billion in three other U.S. money market funds, according to documents filed earlier this year with the SEC. That includes $2.1 billion in the Invesco Aim Liquid Assets Portfolio; $2.3 billion in the JPMorgan Prime Money Market Fund; and $1.5 billion in Deutsche Asset Management's DWS Money Market Trust.

Officials for the four U.S. money-market funds that reported Stable Investment as a shareholder declined to comment. When reached at his home with a question on the identity of Stable Investment, Reserve Management Corp. founder and Chairman Bruce Bent said, ``I have no idea whatsoever.''

Reserve Primary Liquidation

By Sept. 16, the day after Lehman had filed for bankruptcy protection, investors had sought to withdraw $40 billion from the $62.5 billion Reserve Primary fund. Reserve Primary ended up releasing $10 billion at a rate of $1 a share. The last value published for the fund was 97 cents a share.

Reserve Primary's loss triggered a widespread run in which investors withdrew $133 billion from U.S. money-market funds the following two days.

Ming Lee Hatch, a Reserve Management spokeswoman, declined to comment on whether Stable Investment withdrew its cash before Sept. 16. Reserve Primary is liquidating its assets and expects to make an initial distribution of $20 billion to remaining investors on Oct. 13.

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Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.