China Investment An Open Book?

Over the winter, as Wall Street was losing tens of billions of dollars due to the mortgage and credit crises, it wasn't the Fed or Congress that came to the rescue. It was something called sovereign-wealth funds - pools of money controlled by foreign governments.

Desperate for cash, some of Wall Street's ailing mega-banks, like Citigroup, reached out to these funds. So, for instance, Abu Dhabi bought $7.5 billion worth of shares in Citigroup.

Altogether the sovereign-wealth funds of countries like Abu Dhabi and Kuwait have spent over $30 billion bailing out our financial system.

Which has raised troubling questions: are these mostly undemocratic regimes saving Wall Street or invading it? As correspondent Lesley Stahl found out, one fund is of special concern. It's new, highly secretive, and the fifth largest in the world.

"How much do you have to invest?" Stahl asked the fund's president, Gao Xiqing.

"$200 billion," Gao replied.

Last year Gao decided to pour some of those billions into investment houses on Wall Street.

"Was there any thinking in China, given the sub-prime crisis in the United States, that China would come to the rescue?" Stahl asked.

"Some people will try to put it that way. But, you know, at least it's not my thinking," Gao said.

"Now, some people consider what you're doing, as a huge threat," Stahl said. "Your real intention is to 'gobble us up,' you know. They see you as vultures, really. I mean, I've seen that word."

"Or some people say locust," Gao said.

"Locusts?"

"The Europeans call it locusts," Gao said. "The Americans call it vultures."

But vultures we are not, Gao says. We're like a typical investor: our only aim is to make money. Gao bridles at the mistrust.

"Immediately after we announced our existence, then the U.S. Government, some European governments, all came out and said, 'okay, we think of this as - this is a dangerous - we need to do something about it. They probably want to control us. They probably want to do something bad about us,'" Gao said.

The reason Gao agreed to this interview - his first as fund president - is because he wants to dispel any fears that China intends to gobble up U.S. companies.

"It's our policy not to control anything," Gao said.

"So you'll put a lot of money in a foreign company, and not even get on the board?" Stahl asked.

"You're right."

"Why?"

"Simply because we don't want to go in and say, 'OK, I think you should change this person or I think you should change this product line,'" Gao said. "That's not our business."

"Mr. Gao, you know that's very reasonable, but I know that there are people in the United States who would listen to that and become very suspicious," Stahl Said. "They would say it's just a tactic. That's what they're saying now, so our guard will go down and eventually they're going to come in and force these companies to make decisions that will help China politically."

"That's typically the thinking of people who do not understand the actual functioning of the capital market," Gao said.

But people who do understand the capital markets, like economist Peter Navarro, say there's reason to be wary.

"What do you say to the Chinese when they complain that sovereign-wealth funds have been around for decades, and there hasn't been a peep of protest or concern, until the Chinese developed a sovereign-wealth fund?" Stahl asked Navarro.

"I think that the Chinese can say, 'Well, you're singling us out,'" Navarro said. "And we say, 'Yeah, we're singling you out. We think, based on your historical behavior, China, that you're going to do mischief in our economy.'"

He says the problem is that China has over $1.5 trillion in reserves, the world's largest currency surplus. And it's growing by $1 billion a day.

"China has so much money that they can spend buying U.S. companies that the danger is that they can strip these companies," Navarro said. "They can strip the companies of jobs, research and development, technology."

"Do we have any evidence, any reason to believe that they're really going to do that?" Stahl asked.

"It's not a clear and present danger," Navarro said. "It's a clear and future danger."

As he told a Congressional panel in February, his fears grow out of China's pattern of behavior: its unfair trade practices, currency manipulation, technology espionage, and a refusal to crack down on counterfeiting.

Gao's response has been to avoid sensitive industries, limiting his U.S. investments to our financial sector.

"Theoretically, we are allowed to invest in anything," Gao said. "But we look around. If someone comes to us proposing to us to sell some share of a military factory or something, we don't want to touch it."

Asked why they don't want to "touch" the military, Gao told Stahl, "Because we already getting too much, almost unfair amount of attention. You know, the Chinese culture is being self-effacing, try to hide yourself, don't stick your head out for people to knock on."

Gao was raised in China during the cultural revolution, forced to work in an arms factory and on the railroad. But then he did well in school and was sent to study law at Duke University in North Carolina. In 1986 he became the first Chinese national admitted to the New York State Bar.

"And then, you went to work for Richard Nixon's law firm," Stahl pointed out. "Basically working on Wall Street issues. Is that correct?"

"Yes," Gao said.

Stahl continued: "So you understand the American banking system from the legal--"

"A little bit," Gao said.

He took that little bit back home to China and helped reform its economy and create its stock exchange. Now, at 54, he's become one of the most sought-after investors in the world, but one with an unimpressive record in the United States thus far.

"The timing couldn't be worse," Stahl noted.

"You said it."

He has come out even so far in his $5 billion investment of Morgan Stanley; but the fund also has $3 billion in Blackstone, the private equity firm, and its stock has lost nearly half its value. But Gao says he's not selling.

"Are you under any political pressure from the political people in the Chinese government on what kinds of companies to invest in?" Stahl asked.

"So far, none," Gao said.

"What if our two governments had a serious dispute?" Stahl asked.

"Over Taiwan?" Gao asked.

"Yeah. Now could your government come in and say to you, 'pull your money out now?'"

"It could be. But I seriously doubt that will happen."

"It would hurt you, too," Stahl said.

"Definitely," Gao said. "It would hurt me. Hurt the company. Hurt China."

"Here's another fear that Americans have," Stahl continued. "And that is that you'll gain a foothold in a company like Blackstone then have Blackstone go out and buy a company for you, go buy a technically-sensitive company."

"Maybe they love China so much that they just want to steal all your technology for us?" Gao said.

"No, but they'd be afraid if, if they don't do what you want, that you'll pull the money out and then they'll collapse."

"If you think things along that line then there'd be no stopping," Gao said.

Chinese businesses come under severe criticism for their secrecy. So one way Gao could deal with the suspicion would be to make the fund transparent like Norway's sovereign-wealth fund, which is considered the gold-standard. It has a detailed mission statement, earnings reports, and an exhaustive Web site listing all its assets. China's fund has a Web site too: just one page, which is basically a link to a job application. Gao made an unexpected commitment, as he gave Stahl a tour of his offices.

"Look at this wall!" Stahl said, pointing to the building's glass facade. "What do you think? It's very transparent."

"It is! This is what we meant to be!" Gao said.

"Is this a metaphor?" Stahl asked.

"Yes, I think so."

"Well, you don't have any transparency," she remarked.

"Yes, we do."

"No, you don't. You don't produce any annual reports."

"We are only five month old," Gao said. "We haven't gotten to the point of producing our annual report. We are going to produce our annual report."

"You are?"

"Yes, we are," Gao said. "We are going to do things, what Americans will believe as good sovereign-wealth funds, like the Norwegian sovereign-wealth fund."

"You are?"

"Yeah."

"But you know this is a huge issue," Stahl said. "Are you going to be as open as the Norwegians?"

"First, simple answer is yes. But secondly--"

"But?"

"Secondly, as far as commercially viable," Gao said. "Because with that much money on hand, if you tell people what you're going to do next, immediately, everybody you buy becomes very expensive. Everything you want to sell becomes very cheap."

"But you're, right now, pledging, telling the American people you're going to be as open as the Norwegian sovereign-wealth fund is?" Stahl asked.

"Yes." Gao said.

Former treasury secretary Lawrence Summers has been raising concerns about sovereign-wealth funds, so we asked him about Gao's surprise pledge.

"I think there's a question as a degree of specificity," Summers said. "But in a way, their willingness to be interviewed and go on your show is probably not something they would do if they thought of themselves as having some nefarious purpose.

"Well, they certainly want to be reassuring," Stahl said.

"I think that is something we should encourage," Summers said. "But, as Ronald Reagan said, 'Trust and verify.' I think this is an issue our government does need to pay close attention to."

Summers is pushing for an official code of conduct for sovereign-wealth funds. The International Monetary Fund is working on writing some rules, but Gao thinks that's unnecessary.

"Why do you need a law like that? That law will only hurt feelings," Gao said. "It's not economic. It doesn't make sense. Politically it's stupid."

Stupid and unfair, he says, since American hedge funds and private equity firms don't have such a code.

"If you make some kind of, you know, someone singled out as a bad boy then that becomes a problem emotionally," Gao said.

"There was never a call for a code of conduct until China got set up a wealth fund," Stahl pointed out..

"Right. I personally don't have a problem with it, really. You know?" Gao said. "But that's why a lot of other Chinese people are telling us that, 'Look, you know, you guys should be against it. You should stand up against.' I said, 'Why should we bother?'"

"Does the IMF have the power to enforce a code of conduct anyway?" Stahl asked.

"I don't think so."

"Is there any chance on this earth right now, that we could ever say, 'Look, if you don't agree to a code of conduct, even voluntary, you can't invest in our companies.' It's self-defeating, right?" Stahl asked Summers.

"We could say it, but it wouldn't serve our interests at several levels," Summers said. "It would mean that Americans would pay more for goods. It would mean that our interest rates would be higher."

In other words, we're all but dependent on Chinese investments. Beyond this fund, China holds half a trillion dollars in U.S. Treasury bonds. For that reason economist Navarro says they have us over a barrel. If they don't like our behavior, he says all, they have to do is dump all their U.S. investments. It's known as the financial nuclear option.

"What would that do? That will cause interest rates to spike. Mortgage rates to spike. Inflation to spike. The dollar to go through the floor. The stock market to go into chaos," Navarro said. "We would be in deep, deep, deep trouble."

"The nuclear option, financial nuclear option is China's pulling all its money out of U.S. treasuries," Stahl said to Gao.

"Philosophically everything's possible in this world," Gao said. "But that's so unlikely that, you know, if we function on that thing, we just may as well go home and not doing anything."

Gao isn't going home. He says his fund is an extension of trust, not the betrayal of it. And to prove it, despite losing money here, he just made another investment by buying over $100 million worth of shares in Visa.

Produced by Shachar Bar-On