Western banks face snub by China fund

China Investment Corp, the country’s sovereign wealth fund, will no longer risk investing in western financial institutions because of concerns about their viability and a lack of consistency in their governments’ policies, according to its chairman.

“Right now we don’t have the courage to invest in financial institutions because we don’t know what problems we will put ourselves into,” Lou Jiwei said on Wednesday.

Mr Lou contrasted recent shifts in US regulatory and government policy and efforts to rescue ailing banks with the “clearer policies” of some developing countries, where he said CIC was still “actively” pursuing investment opportunities.

“My confidence should come from government policies. But if they are changing every week, how can you expect that to make me confident?” he said at a Hong Kong meeting of the Clinton Global Initiative.

Mr Lou’s comments came before talks that are set to start in Beijing on Thursday between Hank Paulson, US Treasury secretary, and Chinese officials.

Mr Paulson is likely to use the summit to renew calls for Beijing to allow an appreciation of its currency. US and European businesses have long argued that the renminbi, which has been allowed by Beijing to trade only in a narrow band, is kept artificially weak, giving Chinese manufacturers an unfair advantage.

China has let the currency appreciate slowly since ending its peg to the dollar in 2005. But Beijing is coming under growing pressure from manufacturers at home to change tack.

Sharp downward moves by the renminbi against the dollar in recent days have been interpreted by some analysts as a sign that China has shifted policy.

The country’s foreign exchange market was dominated again on Wednesday by expectations that Chinese authorities are now eager to see the renminbi depreciate against the US dollar.

Trading in the renminbi almost dried up at one stage on Wednesday, market-makers said, owing to fears that banks would run out of dollars to meet demand from Chinese investors, prompting the central bank to sell dollars into the market.

Economists said that if expectations of a depreciating renminbi gathered pace, the central bank would have to spend part of its foreign exchange reserves to defend the currency, which would mean selling assets such as US Treasuries.

China’s State Council, the country’s cabinet, on Wednesday also announced measures to stimulate lending and mitigate the impact of the global slowdown on China’s slowing economy.

The council said it would work to ensure there was sufficient liquidity in the banking system and allow the country’s three “policy” banks to make a further Rmb100bn ($14.5bn, €11.5bn, £9.9bn) of loans.