China Investment Corp. (CIC) will reportedly take part in the U.S. government's Public-Private Investment Program (PPIP), which aims to combine taxpayer funds with private capital to buy toxic securities from banks. Such an investment would boost the fledging U.S. program, while also helping China to diversify its holdings of U.S. assets.
CIC, which cannot invest in the program directly, is in talks with nine designated PPIP managers to invest up to $2 billion in mortgage-backed securities, sources familiar with the matter told Reuters.
Some U.S. asset managers earlier this year approached CIC about a potential investment in their funds related to the Term-Auction Loan Facility (TALF), but the sovereign wealth fund was not confident enough in a U.S. recovery to take part. However, many of those TALF-focused investments performed well in the first half of the year as global equities rallied alongside commodities prices.
Additionally, the PPIP program is much smaller than TALF and focuses on assets that are guaranteed by the Federal Deposit Insurance Co. (FDIC) and have "Triple-A" ratings by at least two agencies.
"In this case, CIC feels safer to invest and the safer it feels, the more confident it will naturally feel about its investments, as well as in the prospects for the U.S. economy," said one of Reuters' sources.
CIC expects the U.S. housing market to recover gradually later this year, the source said.
Investing in the PPIP gives China the opportunity to diversify its holdings away from U.S. bonds, as well. China is the world's largest holder of U.S. debt, with at least $763 billion of its $2 trillion reserves held in U.S. securities.
Beijing has routinely voiced its concern about the value of its holdings, which it feels is being eroded by loose monetary policy and a spiraling deficit.
The U.S. Federal Reserve has injected more than $2 trillion into the U.S. financial system, expanding credit through increased loans to banks to provide liquidity. It's also lowered its benchmark Federal Funds rate to a record low range of 0-0.25%.
Meanwhile, the Congressional Budget Office (CBO) projects the U.S. budget shortfall will reach at least $1.85 trillion - equivalent to 13% of the nation's gross domestic product (GDP) - in fiscal 2009.
The U.S. national debt will reach $12 trillion by this fall and exceed $13 trillion by September 2010, according to the.
By taking part in the PIPP, China will be able to boost its holdings of U.S. assets without adding to its mountainous stash of U.S. government bonds. It would also help the fledging program, which since being unveiled in March has struggled to get off the ground.
"PPIP has been a disappointment from a timing standpoint. It's a work in progress and the lack of momentum has been frustrating," Frank Barkocy, director of research with Mendon Capital Advisors, a firm that invests primarily in financial stocks, told CNNMoney. "But given the might of China, it would be encouraging if we could get a player of that size and magnitude stepping to bid for some of these toxic assets. It would be a psychological plus."
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