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US investors who view the recent flurry of strategic purchases by the Chinese government of stakes in US investment banks as ‘smart money’ may be in for a disappointment, a source familiar with the Chinese government’s thinking told mergermarket. The source, who has direct access to the Chinese government officials who decide on what assets sovereign wealth funds such as China Investment Corp. [CIC, Zhong Guo Tou Zi Gong Si] will acquire, says that until now CIC has lacked a clear strategy and will in future focus its investments in the natural resources sector.

The sources’ insights indicate not only that outside investors lack the investment acumen to have spotted a bottom in the credit crunch but also that, in the case of China’s CIC, further investments in the US financial sector will be limited. Warren Buffet’s reluctance to make any moves into the US financial sector, as stated earlier this week, similarly indicate that the credit crunch has a ways to go before investors will be able to call a bottom.

The source said that CIC is currently being advised on a new investment strategy which would involve diversifying away from its current focus on the US financial sector, as recently seen with its acquisition of USD 5bn investment in Morgan Stanley as well as the stake in took in Blackstone last summer. The source said that this advice will be reviewed and approved by the central government in due course.

The original purpose of establishing CIC was to hedge the risks that China’s fast growing foreign exchange reserves has brought, the advisor explained. The huge trading surplus has brought large amounts of US dollars to China which have been depreciating in value while at the same time forcing China to import an increasing amount of natural resources which have been appreciating in value in dollar terms. CIC’s new strategy will focus more on natural resources to hedge this risk, the advisor said.

So far CIC’s investments have been concentrated in the financial sector. In addition to its high profile US banking investments it has also invested in the Central Huijin Investment [Zhong Yang Hui Jin Tou Zi] a wholly owned subsidiary and Huijin which owns large equity interests in China’s major commercial banks including the Bank of China [BOC, Zhong Guo Yin Hang], the Industrial and Commercial Bank of China [ICBC, Zhong Guo Gong Shang Yin Hang], the China Construction Bank [CCB, Zhong Guo Jian She Yin Hang] and the China Everbright Bank [Zhong Guo Guang Da Yin Hang]. Huijin also owns equity interests in some major securities companies including the Galaxy Securities [Yin He Zheng Quan], Guotai Junan Securities and Shenyin Wanguo Securities.

An insider at Citigroup revealed that the US investment bank had first approached the China Development Bank (CDB) to see if it was interested in acquiring a stake in the bank. CDB had shown strong interests in doing so, the insider said, but told Citigroup that it would need three days to make a decision because it needed, as a state-owned bank, to get government approval. At that same time, Abu Dhabi was also offered the opportunity to invest and was able to move forward with the purchase right away. The insider added that it was for this reason that CIC didn’t hesitate when approached by Morgan Stanley about acquiring a stake, having learnt from CDB’s experience that it needed to act quickly.

CNBC reported on Friday that Merrill Lynch had also approached CIC to see if it was interested in acquiring a stake before agreeing a USD 6.2bn deal with Singapore’s Temasek. The Citigroup source said that the fact that the head of Morgan Stanley’s Chinese investment banking arm, Sun Wei, has a close relationship with the VP of CIC, Gao Xiqing, would likely have ensured that the two firms agreed the deal. <br>

The source close to the Chinese government said that while CIC may have thought that the sub-prime loan crisis has created a rare and good opportunity for China to buy into US financial giants at a good price, it is now being advised to maintain caution as regards further investments. For this reason, he said, further moves on the part of CIC into US financial services appear to be off the table.

Indeed, CIC’s diversification strategy appears to have already begun. It was reported earlier this week that CIC was planning to inject funds into China Petrochemical Corp (CPC), the parent company of Sinopec Corp, to help it acquire overseas assets.

And last month it acquired USD 100m worth of shares in China Railway.

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