Total SA: The PRC's Latest Investment Horrowshow?

♠ Posted by Emmanuel in ,, at 4/04/2008 02:38:00 AM
Being a cynical old git, I have portrayed China's efforts to invest its vast reserve holdings as one disaster after another. If there ever was a better example of a me-too investor that's always behind the curve, it's the PRC's state minders. First it bought lots of dollar-denominated Treasuries and is second or most likely already first in the international league tables for holding Uncle Sam's debt papers. Unfortunately, China's rapid accumulation of IOUs has coincided with the marked fall of the dollar--at least against other industrialized countries' currencies. To gain better returns while still maintaining rapid accumulation of US assets, China then went for agency debt from Fannie Mae and Freddie Mac only to retreat again after being buffeted by subprime. To "diversify" further, the China Investment Corporation (CIC) SWF then went for the Blackstone Group's IPO. Unfortunately, the investment went sour almost immediately when Blackstone's stock fell markedly as funding for private equity deals became hard to get in the aftermath of subprime. There's also the CIC's $5B investment in Morgan Stanley which isn't doing too well right now as the stocks of American investment banks continues to fall.

Notice a pattern here? China's investment timing has been rather poor in a "buy at or near the peak" sense. It's all so very horrorshow: my motor-psycho nightmare freak out inside of me. The Financial Times now notes that China has invested in France's Total SA. Setting aside the usual protectionist pressures from the French--remember, these are the folks who brought the world "yogurt protectionism," whatever that is--it will be interesting to see if this Chinese official investment turns sour like the rest of the lot. To me and probably many others, official Chinese interest is the ultimate sell signal. In fact, I'm thinking of setting up my own hedge fund. Its strategy? Short anything China buys into. Anyway, the article is also interesting in that it details internal conflicts between the State Administration of Foreign Exchange (whose acronym of SAFE is anything but given its past investment record) and the newly set up SWF, the CIC:

The body that manages the bulk of China’s $1,650bn in foreign exchange reserves has bought a 1.6 per cent stake in France’s Total, the fourth-largest oil group, in a sign of its more aggressive approach to investing the funds under its control. China’s State Administration of Foreign Exchange, or Safe, which operates under China’s central bank, began building its stake, valued at €1.8bn ($2.8bn), several months ago, according to a person close to the company. It is understood that this has been done with the full knowledge of the oil company and representatives of Safe are likely to have met Total’s team, the person said.

News that France’s biggest company by value has drawn the interest of Chinese funds is likely to revive a debate over economic patriotism in France, a phrase coined by Dominique de Villepin, the former prime minister, after rumours of a possible bid for Danone by PepsiCo of the US sparked a national outcry.

In China, the revelation of Safe’s purchase will heighten tensions between it and the China Investment Corporation, the country’s sovereign wealth fund established last September, with $200bn of funds under its control. Safe’s more aggressive investment posture after the establishment of the sovereign wealth fund has caused divisions at the top of the Chinese government because of concerns that two agencies could be competing in what Beijing recognises as a geopolitically sensitive area. The CIC’s attempts to establish itself in the global investment community as a transparent and independent investment entity, a challenge given the focus both on China and sovereign funds generally, is being damaged by Safe’s assertiveness, according to officials in Beijing. Safe usually invests most of its funds in low-yielding securities, such as Treasury bonds and mortgaged-backed securities, but the falling US dollar has also put pressure on it to diversify its portfolio. China added more than $100bn in funds to its reserves in the first two months of this year alone, all of which come immediately under Safe’s control.

Nicolas Sarkozy, the French president, has said that state-owned funds are welcome to invest in France as long as they are transparent and that French companies can invest freely in their countries. Total says it is used to having state funds as investors and even welcomes them. “These funds are no different from other shareholders,” the company said. “In fact, Total actually welcomed this development as these public investors helped to create a stable long-term shareholder base.”

Safe is the only Chinese public fund to have taken a meaningful stake in Total. The group already has sovereign investors from Norway and the Middle East among its shareholders. According to Total’s latest accounts, 88 per cent of its shareholder base is accounted for by institutional investors. About 8 per cent is held by individual entities. The biggest single shareholder in the oil company is Albert Frère, the Belgian entrepreneur, with 5.3 per cent, while employees own 4 per cent. Safe could not be reached for comment.