Chinese to buy stake in Bear Stearns

Fuelled by its massive foreign currency reserves from years of spectacular export growth, China's so-called "sovereign" or state-owned investment fund has already this year pumped billions of dollars into overseas companies.

It has taken huge stakes in both Barclays in the UK and private equity group Blackstone of the US.

China has also built up enormous economic and political interests in Africa and Asia, with dominant investment positions in countries as far afield as Sierra Leone and Burma.

But in terms of size, the Bear Stearns deal could be its biggest yet. It is expected to eclipse China's biggest foreign investment so far, beating the $3 billion (£1.4 billion) 10% stake it took in private equity firm Blackstone as well as the £1.5 billion for a 3.1% stake in Barclays.

China's massive sovereign investment muscle threatens to remodel the global financial landscape as it targets equity investments around the world.

Given the political and cultural differences, this has been seen as a threat in some quarters.

But the country is at pains to allay fears that it wants to take control of foreign firms.

Jiang Dingzhi, vice chairman of the China Banking Regulatory Commission, confirmed that Bear Stears was in Citic's sights but declined to give any details.

With a market value of $17.4 billion, Bear Stearns, is said to be in "serious" talks with several outside investors and could sell a stake of up to 20% worth $3.5 billion.

The bank, the fifth-largest US securities house, is a prime target for bargain hunters, its stock having fallen 15% since June when two of its hedge funds failed on mortgage-backed securities bets that went bad.

Warren Buffett is also said to be considering a position in the bank.

But some analysts in Asia say it is a learning curve, more than an investment issue for the Chinese.

"For China, it's important to have a platform to learn what investment banking is," Arthur Lau of JF Asset Management in Hong Kong, told Bloomberg.

Citic group president Chang Zhenming declined to comment on talk of a bid.

Chang is a friend of Bear Stearns CEO James Cayne, an avid bridge player. "We played cards together back in 1992," Chang said.

Not only China but Russia and Middle East countries are racking up huge surpluses that are flooding into investment markets. France and Germany have expressed misgivings, but Chancellor Alistair Darling has declared Britain open to sovereign investments.

The impact of sovereign investment funds like those of China or the Gulf states like Qatar, on western capitalism was the subject of a study yesterday by Standard Chartered. This reported, among other things, on the problem that the funds hail from countries where rules on commercial transparency and other western ideas of good practice do not exist.

As Tony Hilton noted in yesterday's Evening Standard (click here to read the column in full), China, Taiwan and Japan's reserves are now equivalent to 15% of the world's gross domestic product. That power leaves open big questions for western politicians about to whom they are willing to sell their countries' prime assets.

While the UK has an open door policy on foreign investors, allowing the likes of the Qataris to bid for Sainsbury's, for example, the US has been far more protectionist, notably blocking Dubai from buying US ports in the takeover of P&O Ports.

For the Standard Chartered report, see http://www.standardchartered.com/global/news/2007/grp_20071015.pdf