From Buy China to China Buys…

If you read the business section of any major US newspaper today, the headline is definitely Geely is buying Volvo for $1.8 Billion.

From Hummer to Volvo, and from iron ore mines in Australia to the oil sand business in Alberta, the Chinese are quietly putting their huge foreign reserves (almost $2 trillion) to what they would consider as strategic assets that are necessary towards building the modernized and industrialized China.

As a Chinese, I am glad to see that the government has finally decided to depart from simply buying US Treasury Bills. After all, basic investment class have taught us that it is unwise to put all the eggs in one basket, especially the basket is being made by a country who is, put it mildly, has many ideological differences with China.

However, it is also unfortunate to see that China is paying some hefty prices along the way. One such example is BlackStone, the American private equity company that China paid $29.605 in 2007. The share was traded at $14.53 on Friday, less than half of the purchase value.

For some reason, the Blackstone nightmare constantly reminded me of the sovereign investment history of Saudi Arabia in the 70s, and more recently, Japan in the early 90s.

I still remember the first time I went to visit the Empire State Building in New York, they were showing a video about the history of the building, which mentioned that it was bought by the Japanese for $42 million in 1991 and then sold back to Donald Trump for less than half of that amount a few years later.

The common part between the Chinese boom, and what happened to Saudi Arabia and Japan is that all countries have an extraordinary amount of wealth. Yet, none have the proper way to manage the wealth.

Yes, with the money, China could hire the best money managers on Wall Street, but just like the same theory why China should not invest everything in T-Bills, a foreign talent simply would not be a good choice.

It is critical, therefore, for China to have its own home-grown investment managers, who are familiar enough with the international market, yet has a good understanding of the needs and the Chinese business mentality and politics.

Only then, China would be a mature investor in the international arena.