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US warns China about its use of SWF earnings

"China should not use the earnings of its sovereign wealth fund to delay the continued increase in the flexibility of China's currency."

Robert Dohner, deputy assistant US Treasury secretary for Asia

The US Treasury cautioned China on Thursday against using profits derived from its cash-flush sovereign investment fund to delay currency reform, as the fund's maneuvers came under congressional scrutiny.

The China Investment Corp (CIC, 中國投資公司), launched in September with US$200 billion capital, wants to boost investment returns on China's massive foreign reserves and manage reform of domestic financial institutions.

"China should not use the earnings of its sovereign wealth fund to delay the continued increase in the flexibility of China's currency," Deputy Assistant US Treasury Secretary for Asia Robert Dohner said.

"It is important that China move more rapidly to increase renminbi flexibility," he said at a hearing of the US-China Economic and Security Review Commission, a congressional advisory panel which considered implications of sovereign wealth fund (SWF) investments for national security.

The yuan currency is seen by US lawmakers and other groups as undervalued against the dollar, making US-bound Chinese exports cheaper and fueling a trade deficit, which hit a record of more than US$238 billion last year.

Several bills have been proposed in the US Congress threatening China with sanctions if it did not allow greater currency flexibility.

Dohner called on China's leaders to keep their word that CIC would operate on an entirely commercial basis and in an open and transparent manner.

"We will continue to work with CIC and other SWFs and watch their activities vigilantly," he said.

SWFs, including from oil-rich Middle East nations, have come under tight scrutiny in recent months as they use excess foreign exchange reserves to buy stakes in financial institutions, especially in credit-tight US.

In the US, CIC bought a US$3 billion stake in private equity firm Blackstone Group LP and announced plans to invest US$5 billion in Morgan Stanley, for an ownership stake of no more than 9.9 percent of the investment bank's total outstanding shares.

Several US lawmakers expressed concern at the hearing over China's financial maneuvers, saying that it could pose a threat to US economic security.

But Linda Thomsen, director of the US Securities and Exchange Commission's enforcement division, said the CIC's appeared to be taking a "measured approach" to its investments and was acting as a "passive investor."

"Can Carlyle or Bear Stearns rest easy that they will have an equal opportunity to get access to China's markets?" asked Democratic Senator Sherrod Brown, citing leading US business groups.

"And do we really think that a nearly 10 percent is a passive investment in the practical sense of the word," he asked.

Democratic Representative Marcy Kaptur called for disclosure and increased transparency of all SWF bids and suggested beefing up regulation.

Democratic Senator Jim Webb said "passive" investments could still provide foreign governments and state-owned corporations with "control" over sensitive national security information.

The White House on Thursday urged lawmakers to be "very, very careful" at considering legislation that could curb foreign investment.
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