Three Chinese institutions were among the world's top four banks at the end of 2007 at a time when the market capitalisation of Western banks was suffering from a global financial crisis, a study showed Wednesday. The number one spot in the rankings, compiled by the Boston Consulting Group, was occupied by the Industrial and Commercial Bank of China, with market capitalisation of nearly 340 billion dollars (218 billion euros). In second place was China Construction Bank, followed by HSBC of Britain, Bank of China, Bank of America and Citigroup of the United States. The study found that banks in North America and Western Europe had suffered a loss of 695 billion dollars in market capitalisation at the end of 2007 while their counterparts in emerging market countries Brazil, Russia, China and India had seen their market capitalisation increase by 753 billion dollars. Major US and European banks have suffered losses and asset writedowns stemming from the near collapse of US subprime -- high risk -- mortgage sector, which undermined the value of billions of dollars' worth of their mortgage-backed securities.

This is another reason why the US government shouldn't be spending borrowed money to finance extra-constitutional spending. The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation. Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (?658bn) of foreign reserves as a political weapon to counter pressure from the US Congress. Shifts in Chinese policy are often announced through key think tanks and academies. Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels. It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds. When the federal government is asked to do things the Constitution doesn't tell it to do, and when more and more money flows through it, and with that more and more power, it's hard to stop spending. And with that comes borrowing. And with that comes slavery. The same thing could happen even if spending were kept in the context of the Constitution, but once you escape its limits, there is then no limit. The rich rule over the poor, and the borrower is servant to the lender. - Proverbs 22:7 (NIV)

China's oil giant Sinopec Group has signed a US$70 billion oil and natural gas agreement with Iran, which is China's biggest energy deal with the No. 2 OPEC producer. Under a memorandum of understanding signed Thursday, Sinopec Group will buy 250 million tons of liquefied natural gas over 30 years from Iran and develop the giant Yadavaran field. Iran is also committed to export 150,000 barrels per day of crude oil to China for 25 years at market prices after commissioning of the field. Iran's oil Minister Bijan Zanganeh, who is on a two-day visit to Beijing pursuing closer ties, said Iran is China's biggest oil supplier and wants to be its long-term business partner. Official figures show that China imported 226 million tons of oil in2003, about 13 percent of which coming from Iran. Beijing expects to secure foreign energy supplies by the deals for its economy, which has turned China into a major oil importer but suffers severe power shortages.A former KGB officer said to be close to President Vladimir Putin was selected at a shareholders meeting Monday to head Transneft, the state-owned monopoly pipeline operator. Nikolai Tokarev had run state-owned oil exporting firm Zarubezhneft since 2000, the year Putin became president. He previously had served a brief stint at Transneft as vice president. Tokarev will replace Semyon Vainshtok, who was picked to head the state-run corporation overseeing construction of sports facilities and infrastructure in Sochi for the 2012 Winter Games.

The choice of a former KGB officer to run Transneft, which is 75 percent state owned, comes ahead of parliamentary and presidential elections in Russia and fits a Kremlin pattern of putting trusted people in key government and corporate positions. "This is part of the configuration around the presidential succession," said Vladimir Pribylovsky, a political analyst.Bulgaria and Russia signed a deal Friday to build a natural gas pipeline that would undercut a rival project backed by the U.S. and European Union and strengthen the Kremlin's dominance over EU energy supplies.The agreement came after visiting Russian President Vladimir Putin pushed hard to secure Bulgaria's crucial participation in the projected South Stream pipeline, which would cross from Russia under the Black Sea to Bulgaria and then branch off for delivery deeper in Europe. Putin brushed off concerns about Russia's increasing influence, saying after the signing ceremony that the pipeline agreement and other deals would "seriously increase the energy security of the Balkans, Europe as a whole and, of course, Bulgaria." The deal required last-minute negotiations, amid tough bargaining by Bulgaria and wariness about Russia's clout. The Bulgarian Cabinet approved the agreement at an extraordinary meeting only a few hours before it was signed.Bulgaria's interests are fully protected, because the company which will be set up to construct and run the pipeline on Bulgarian soil will be with 50 percent Bulgarian and 50 percent Russian ownership," Bulgarian Prime Minister Sergei Stanishev said. Russia's state-controlled gas monopoly, OAO Gazprom, had previously been offering a minority stake in the part of the pipeline that would run through Bulgaria.

"Until yesterday, the Russian side insisted on holding a 51-percent stake," Stanishev said. He said Putin himself deserved most of the credit for the progress in the late-night negotiations. But despite the concession, the imminent deal was a victory for Putin and Russia, which is already Europe's dominant gas and oil supplier and is seeking to increase its control over westward routes for its energy supplies from the former Soviet Union. "It's very important that the parties have shown their ability to compromise, and the draft that has been was prepared reflects a balance of interests," Gazprom chairman Dmitry Medvedev, who is likely to succeed Putin after the March 2 presidential election, said after meeting with Stanishev. He said agreements on South Stream "will work for decades and make it possible to ensure stable conditions for future energy deliveries for Bulgaria, Russia and EU nations."

Gazprom has set up a parity joint venture with Italy's ENI SpA to develop a feasibility study for the 900-kilometer (550-mile), $10 billion pipeline. The project is a direct rival to the Nabucco pipeline, sponsored by the United States and the European Union, which would also come through Bulgaria. Taking advantage of the clashing pipeline offers, Bulgaria has bargained with the Kremlin. On Thursday, Bulgarian President Georgi Parvanov underlined his nation's support for the EU's efforts to diversify energy supply routes -- and for Nabucco -- in a speech at a ceremony marking the opening of a Russian cultural festival in Bulgaria. After Parvanov had spoken, a clearly annoyed Putin, standing next to him, said Bulgaria was free to chose its direction but warned it to make sure it "works to its benefit." ENI CEO Paolo Scaroni played down the rivalry between South Stream and Nabucco following meetings with Gazprom CEO Alexei Miller, saying both would be needed because of growing demand. But South Stream would undercut Nabucco and dash the European Union's hopes of reducing its growing reliance on Russia, which now supplies up to 40 percent of Europe's gas and up to a third of the oil imports of some European countries. South Stream would have an estimated annual capacity of 30 billion cubic meters (1.15 trillion cubic feet), roughly equivalent to 60 percent of the natural gas consumed annually in The Netherlands. The Kremlin's plans have upset opposition parties and non-governmental organizations in Bulgaria, who fear the former Soviet satellite's increasing dependence on Russian energy supplies and criticize Moscow's human rights record. With Putin and Parvanov looking on, officials also signed a $5.9 billion contract to build Bulgaria's second nuclear plant near the northern town of Belene.

Also signed was an agreement for a joint company, also including Greece, to build the Burgas-Alexandroupolis oil pipeline, which will channel Russian oil from the Black Sea to the Aegean, bypassing Turkey's busy Bosporus. As part of its energy blitz, Russia has promised to extend South Stream into Serbia and build a huge gas storage facility there -- moves that would turn the Balkan nation into a major hub for Russian energy supplies to Europe. Miller said Gazprom and Serbian officials were close to a final agreement on a deal that would envisage a South Stream branch reaching Serbia, and would also foresee Gazprom taking a controlling stake Serbia's state oil company NIS. Belgrade has turned increasingly away from the West and toward Russia, which has supported Serbia in the debate over independence for Serbia's Kosovo province.

With the official launch of the Chinese Investment Corp, China's new financial juggernaut will be both a formidable opportunity and challenge for the west. The Chinese Investment Corp. (CIC) has been officially launched, and with an initial endowment of US$200 billion the new state-controlled company is tasked to invest abroad China's huge foreign reserves. In the shopping bag there will be natural resources from developing countries as well as foreign technologies, research and development (R&D) establishments and brand names from developed economies. For the west, China's new financial juggernaut will be a formidable opportunity, and a formidable challenge. After various announcements, on 27 September, the Chinese authorities officially unveiled the CIC. Under the direct supervision of the State Council, the nation's cabinet, the CIC is mandated to invest abroad the huge reserves accumulated by Beijing over the last years. China's forex topped US$1.33 trillion at the end of June and are expected to reach US$1.5 trillion by the end of the year, the largest in the world. Lou Jiwei, a deputy-secretary general of the State Council and former finance minister, will be the director of the new company.

China's investment corporation has been under preparation for some time. At the conclusion of the annual session of the National People's Congress in March, the Chinese government announced that it would set up a State Foreign Exchange Investment Company (SFEIC) aimed at improving the yield of the country's foreign exchange reserves and generating the largest returns possible. In May, the new company, while still in preparation, invested US$3 billion of its reserves in non-voting shares of the Blackstone Group, the New York-based private equity firm that recently went public. With the establishment of the CIC at the end of September, the contours of China's investment strategy have become clearer. The CIC strategy
The CIC is modeled on the Singapore investment company, Temasek Holdings. Temasek is an investment firm incorporated in 1974 and headquartered in Singapore. Its portfolio spans various industries including telecommunications and media, financial services, real estate, transportation and logistics, energy and resources, infrastructure, engineering and technology as well as bioscience and healthcare. The Chinese sovereign wealth fund will also be a private equity vehicle, operating on a flexible investment horizon with the option of taking concentrated risks. Lou Jiwey, the CIC's director, declared that the new company would "invest, manage and add value to the Chinese portfolio" as an owner of its assets and investments. Beijing currently holds its reserves in US treasury bonds and other safe but low-yielding, instruments. According to Chinese sources, the CIC will likely be "equity-heavy." Analysts at Morgan Stanley also expect the Chinese company to hold a substantial share of its assets in equities, not sovereign bonds. "The company's principal purpose is to make profits," Li Yang, director of the finance research institute at the Chinese Academy of Social Sciences (CASS), told ISN Security Watch. The CIC has an initial capital of US$ 200 billion, but presumably the amount will be increased according to the investments that the company will support. In practice, the CIC will issue RMB-denominated bonds and sell these bonds on the market to buy foreign exchange funds from the central bank. It will then use the foreign exchange funds for investment. In June, China's legislature approved a special issuance of RMB 1.55 trillion (US$200 million) in treasury bonds for the new investment company. The CIC will operate in both the domestic and global markets. Internally, the investment channels of the new vehicle will include another Chinese state-owned company founded in 2003, the Central Huijin Investment Corp., which has been merged into the CIC as a wholly owned subsidiary company. Central Huijin holds shares in China's four leading commercial banks and in 2005 injected US$60 billion into three of them. While Central Huijin will be one of the financial vehicles adopted as the central bank's investment arm to improve the balance sheets of Chinese state-owned banks, the CIC will be more of a strategic investment fund focused on industry and private equity. Internationally, the CIC will be Beijing's investment arm in a range of sectors and countries. Its initial endowment and future prospects make it one of the biggest in the world.

According to a report by Chatham House published in September, the CIC soon will be the number two in the world, behind the Adia, the sovereign wealth fund of the United Arab Emirates, but ahead of both the Gic, the Singaporean fund, and the Norwegian Government Pension Fund. The central question is therefore where and in which sectors the CIC will invest its capital. According to sources, China's international investment strategy will take two directions. One the one hand, it will invest in natural resources in developing countries. On the other hand, it will concentrate on the acquisition of foreign technologies, R&D establishments and brand names in advanced economies. According to Li Rongrong, director of the China State Asset Management Commission (the agency that oversees government assets), the CIC may also help major state-owned companies expand overseas.

Taking the world by investment
Since the mid-1990s, the search for natural resources has continued to gain momentum as a result of China's high economic growth, with increasing emphasis on oil and industrial raw materials. In its 2006 World Investment Report, the United Nations Conference on Trade and Development (UNCTAD) indicated that China's outward foreign direct investment had more than quintupled in the first half of this decade, to reach US$11.3 billion in 2005. South-East Asia, Latin America and Africa have become the prime targets. For instance, in 2002, the China National Offshore Oil Corporation became the largest foreign oil producer in Indonesia after its takeover (for US$585 million) of Repsol Indonesia. In Africa, China's investment strategy has been directed mainly at sourcing natural resources, including oil. Moreover, increasing numbers of Chinese companies have recently established production bases to supply local markets with cheap products highly compatible with local demand and purchasing power. As a result, total trade between China and Africa nearly quadrupled in six years, from US$10.8 billion in 2000 to nearly US$40 billion in 2006. China is today Africa's biggest trading partner and the second most important investor. China's new investment company will further boost these trends. At the same time, China will invest more and more in developed countries, where its presence is often welcomed for the jobs, cash and infrastructure that it brings. In Australia, for example, China has become the biggest foreign investor in the mining sector. The CIC will place more emphasis on the acqui?sition of advanced technologies, R&D establishments, managerial know-how, distribution networks and brand names. China's investment strategy will likely take the form of profitable participation in private equity funds as well as strategic participation in foreign investment companies running businesses considered of importance for China. While normally in the first case, the CIC would hold a minority stake or give up voting rights for the entitlement of a higher return (as in the Blackstone investment fund), in the event of acquisitions of strategic assets, China's investment company would presumably detain the majority of shares or in any case full control of the company. It is in this scenario that questions of corporate governance, transparency and strategic considerations will be unavoidable.

Eye on Europe: challenge and opportunity
While in the US protectionist tendencies may create difficulties for China investing in key strategic sectors, Europe is emerging as the most attractive place for China's technology-seeking shopping spree. China is eyeing Europe's IT, aerospace and defense sectors as investment opportunities, both in terms of profitable returns on its foreign reserves and in terms of acquisition of advanced technologies needed for China's industrial (and military) modernization. Chinese investments in European companies would be helped by the fact that EU-China relations are characterized by the conspicuous absence of issues that could provoke a confrontation between the two sides - such as the Taiwan question. Unlike the US and Japan, Europeans look at China almost exclusively in terms of business opportunities and not as a possible military competitor. Some EU policy makers - such as the Italian minister for the economy, Tommaso Padoa-Schioppa - have openly invited the CIC to invest in Europe. At the same time, French President Nicolas Sarkozy and German Chancellor Angela Merkel have called for a European "golden share" to protect industrial strategic assets from unwanted takeovers from sovereign wealth funds (SWFs). EU Economy Commissioner Joaquin Almunia added that "the EU might restrict investments by government funds unless they disclose more about what they invest in and why." The CIC will thus be, on the one hand, a great opportunity for some industrial sectors, as it will offer fresh money into tight markets after the sub-prime mortgage crisis. On the other hand, the Chinese investment vehicle could well succeed in gaining control of western assets and advanced technology that could be turned into military might in a situation where there could be future tensions in US-China relations, especially over Taiwan. In sum, for the west, the new Chinese investment corporation will be a great economic opportunity, but also a formidable strategic challenge to watch.