China Rivals Middle East as Biggest SWF Investors in U.S.

In yesterday’s blog(How Do You Spell Sub-Prime Relief? S.W.F.), I told you how the Persian Gulf States are busy investing cash from their Sovereign Wealth Funds (SWFs) into cheap U.S. assets.

Across the Pacific, the Chinese are also playing the same game. And it seems the prime-targets for SWF cash flows are in the beaten-down financial sector.

According to an article in the Financial Times, Morgan Stanley estimates SWFs “have injected more than $37bn into financial stocks since the beginning of the year - four times the amount they invested in 2006.”

Before Abu Dhabi made its move in Citigroup, Dubai International Financial Center took a 2.2% stake in Germany’s Deutsche Bank, and more recently said it is looking for “acquisitions in the U.S., where the falling dollar and a lending crisis are driving down the price of banks and property.”

Nothing like housing recession and credit crunch to create bargains! Although the Gulf States grabbed the big headlines with the Citigroup purchase, the Chinese have been particularly active.

Far Eastern Sovereign Wealth Moves West

China's Ping An Insurance recently purchased a 4.2% interest in Belgium’s Fortis Financial Group for $2.7 billion. In October, Wall Street firm Bear Stearns, facing big sub-prime related losses and in need of fresh capital, sold a stake to China's government-controlled Citic Securities Co. for $1 billion. And early this year CIC invested $3 billion in private equity firm Blackstone Group just prior to its initial public stock offering.

In an environment where the cost of money isn’t nearly as important as the value of collateral; the Fed may be pushing on a string with lower interest rates. However, the world’s sovereign wealth funds are flush with cash, and are already swooping in on the beaten down U.S. financial sector.

SWFs in Asia and the Persian Gulf states certainly have the wherewithal to stay on this buying spree. In 2006 alone, global capital flow coming out of East Asia and oil producing countries in the Middle East totaled nearly $1 trillion. That’s almost triple the amount of cash flow coming from Europe.

In spite of a bounce in the over-sold dollar near-term, the inevitable byproduct of the Fed’s easy-money policy is bound to be further erosion in the buck over the longer term. Resumption of the dollar’s depreciation should only make U.S. dollar denominated assets of all kinds appear even more attractive to foreign purchasers.

I see a giant wave a asset purchases coming from European, Brazilian, Canadian, Arab and Chinese investors – maybe they’ll even breathe new life into the beleaguered Miami condo market!