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China reluctant to invest in foreign banks

HONG KONG - China's sovereign wealth fund, which last year poured $5 billion into Morgan Stanley, is reluctant to plow more money into foreign financial institutions until governments hash out coherent policies to cope with the global economic and financial turmoil, the fund's head said Wednesday.

The remarks by Lou Jiwei, chairman of the $200 billion China Investment Corp., represent a new blow for ailing banks that were hoping the Chinese government investment fund would use its deep pool of cash to bail them out.

Lou said that he was unwilling to invest in foreign banks amid so much turbulence and uncertainty. Confidence in financial institutions is lacking because foreign governments seem to be changing their policies every week, he said.

“Right now, we do not have the courage to invest in financial institutions," said Lou, speaking on a panel discussion in Hong Kong at a conference organized by former President Bill Clinton.

He added, “We have to wait for the time when there won't be massive collapses of financial institutions."

The Chinese government investment arm was set up to make profitable use of Beijing's foreign reserves, which totaled $1.9 trillion by the end of September.

Most of those funds are kept in U.S. Treasuries and other safe but low-yielding securities. But there have been complaints about the performance of some of the fund's higher profile investments amid the recent market turmoil.

CIC's biggest investment to date was a $5 billion investment in Morgan Stanley in December 2007 _ one of nine major banks that subsequently sought relief from the deepening credit crisis through the U.S. government's $700 billion banking bailout. That investment gave CIC a 9.9 percent stake in the investment bank.

The Chinese sovereign wealth fund was also said by Chinese media to have invested more than $100 million in Visa Inc.'s $19.1 billion initial public offering in March and has invested in a fund managed by J.C. Flowers, a U.S. private equity firm.

Last month, the private equity firm Blackstone Group said in a regulatory filing that it has agreed to raise CIC's ownership limit from 9.9 percent to 12.5 percent. CIC paid $3 billion for a stake in Blackstone's June 2007 initial public offering, but it has seen the value of that investment plunge _ a major sore point for many Chinese officials and citizens.

Also speaking on Wednesday's panel, called “Moving Forward: Coping with the Financial Crisis," was Laura Tyson, professor of the Haas School of Business at the University of California, Berkeley. Tyson argued that governments needed to spend more money to stimulate the global economy and speed up recovery.

“China is one of the countries in the world that is well positioned to be part of the solution," she said.

Lou said China's fund would help soften the bite of the ongoing global crisis by continuing to invest in wealthy countries as well as in developing nations. But he said people should not count on China to pull the world out of the economic crisis.

“China can't save the world. It can only save itself," he said.

Lou said China's economy, the world's fourth largest, is in relatively good shape, but is facing several major challenges, such as boosting domestic consumption and becoming less dependent on exports.

“This will be very difficult and requires a lot of reforms," he said. “It might take one to two years."

Another panelist, Stephen Roach, chairman of Morgan Stanley Asia Ltd., said that the financial crisis will help accelerate the shift of economic power to Asia. But he said that Asian economies still had much more to do before the region can stand on its own as an economic force.

For example, Roach said, Asia is more dependent on exports than ever before. He also said Asian consumers aren't spending enough because they believe they need to save money for emergencies in societies lacking safety nets, like health insurance, pensions and unemployment funds.

“I think there's a lot of heavy lifting that still needs to take place in Asia," he said.