Gao: Don’t expect CIC to bail out Europe

Emerging Markets, September 2011

China’s sovereign wealth fund will not invest in new eurozone bonds, but expects to find other investment opportunities amid the chaos in Europe.

Gao Xiqing, Vice-Chairman and President of the China Investment Corporation, said the fund would not follow the lead of the Chinese sovereign in investing in securities issued to support troubled Eurozone states, such as the European Financial Stability Facility (EFSF). “You heard from our Premier, we like to support Europe,” he said. “But as a corporation our mandate from the government is to maintain a certain amount of profitability given the risk adjustment rules. We can’t just go there and try to save someone. We have to save ourselves.”

He told Emerging Markets: “We have our own requirements, our own mandate and asset allocations, so we have to act on that principle alone.”

But asked if he thought investment opportunities would arise for CIC as a consequence of European turmoil, he said: “That’s true. There will always be opportunities wherever there are problems, that I know. But at a macro level you have to be very careful.” CIC, which had US$374.3 billion under management at the end of 2010, was previously burned by $10 billion of ill-timed investments in Morgan Stanley and Blackstone ahead of the 2008 financial crisis.

In comments to a packed session on the eurozone in the IMF’s headquarters, Gao had some sharp comments about the problems that have led to the crisis. “Culturally you need to change your way of living, your way of spending,” he said. “Lots of people blame the Chinese for saving too much money and not spending; that made it possible for European and American friends to borrow. You should probably reinvent the system.”

He also said that Europe’s diversity was part of the problem. “A lot of people still doubt whether Europeans can get together and have fiscal union. All the people down in the south are trying to work five hours a day and three days a week, in the north eight hours a [day]. The Chinese work 100 hours a week.”

And he blamed ease of credit for exacerbating problems in the western system. “In this country and Europe, people are able to borrow money beyond their means,” he said. “You cannot live off tomorrow’s money, or someone else’s money – but today you are, because of all the geniuses employed by investment bankers. Now the pendulum is swinging. You need to get onto these things: they are innate in your system and you have to rethink.”

He was also bearish on Europe’s ability to fix its problems. Responding to another panelist’s comment that disintegration of the eurozone was unlikely, he said: “The fact that it’s going to be really bad, like the end of the world, doesn’t mean it isn’t going to happen. There is so much procrastination and inaction.” He said that there was ample liquidity available to meet Europe’s investment needs. “There are multi trillion dollars out there. I hope it works, but this whole system needs to be reformed.”