Financial Times (12.11.07).

China fund warns against protectionism.

By Martin Arnold in London

The head of China’s new $200bn sovereign investment fund on Monday warned western governments against using “national security” as an excuse for protectionism, saying his fund would boycott such countries.

Speaking at a dinner hosted by the Lord Mayor of London at Mansion House, Lou Jiwei, chairman of China Investment Corporation, said: “National security should not be an excuse for protectionism.”

Mr Lou presented his fund as “a stable force in the market” and said any protectionist backlash against fast-growing state investment funds such as CIC could “change the stability and security of global financial markets”.

The UK has welcomed his decision to make his first official foreign visit to Britain rather than New York. CIC’s first overseas office is likely to be in the City of London. Britain’s welcome has contrasted with the more protectionist attitude of Nicolas Sarkozy, French president, and Angela Merkel, the German chancellor.

Mr Lou, a former vice minister of finance, appeared to be directing his main warning towards the US, which has witnessed a fierce backlash against foreign state investments in companies considered part of “national security”.

“If an economy will use national security as a criteria for entry of sovereign wealth funds, we will be reluctant to tap the market because you are not sure what will happen,” he said.

A nationalist outcry in the US forced China’s CNOOC to drop a bid for the Unocal oil company in 2005, and Dubai Ports World to abandon its bid for P&O’s US ports.

Mr Lou said CIC would increase its transparency, addressing charges of opaqueness that have been thrown at other sovereign wealth funds, such as Singapore’s Temasek.

“We will increase transparency without harming the commercial interests of CIC. That is to say it will be a gradual process. Transparency is really a tough issue. If we are transparent on everything, the wolves will eat us up,” he said.

Sovereign wealth funds have become important sources of capital for western financial groups, such as Citigroup, which received a $7.5bn (£3.7bn) cash injection from Abu Dhabi Investment Authority. CIC’s first investment was a $3bn purchase of almost 10 per cent of Blackstone, a leading US private equity group.

Mr Lou played down his own importance. “Compared with the financial markets in the City of London, CIC is just a newborn baby and we would like to learn from you,” he said.

“Whenever China creates something, it always attracts great interest. Though we are only a newborn baby, they regard us as a giant.”