As China Investment Corp. joined the possible suitors hoping to snap up a battered Lehman Brothers, an interview with th the sovereign wealth fund’s chief showed even though that deal didn't happen, he was sticking with investments in Wall Street stalwarts Morgan Stanley and Blackstone—positions that have turned out to be losers so far.
 
"Yes, the valuations of Blackstone and Morgan Stanley have fallen after we bought our stakes. But we believe both are strong financial-services companies and have bright futures," said Lou Jiwei, the $200 billion fund’s chairman and chief executive officer, in an interview with Institutional Investor magazine. "Over the longer term we remain confident with both companies."
 
(The entire interview can be found on the magazine’s website).

The Financial Times reported Friday that C.I.C. had joined a group that included private equity fund J.C. Flowers and Bank of America to bid on the stumbling Lehman. Now that Lehman was left to fall and Merrill gobbled up by Bank of America, those whispers didn't become real. Still it shows that the C.I.C. under Lou is no longer shy about jumping into the fray, especially when it comes to U.S. financial firms. Now that the world has shifted, investors in Blackstone and Morgan will be watching C.I.C. closely.

During his interview with I.I., Lou takes pains to portray C.I.C. as a "stakeholder" in the global financial system. The fund, he says, aims to be a mostly passive investor that pursues commercial objectives and usually doesn’t seek board representation, although the board doesn’t rule that out.
 
"Roughly 60 percent to 70 percent of China’s gross domestic product is tied to the world economy. You can see how open China’s economy is to global trade," he says in the interview. "We want to see long-term stability in global financial markets because long-term stability is to our benefit. The U.S. markets are going through turbulent times. We hope to see the U.S. recover after the subprime crisis.

The fund bought 9.9 percent of private-equity giant Blackstone Group for a cool $3 billion in June 2007, even before its formal establishment. In December, C.I.C. helped recapitalize Morgan Stanley with a $5.6 billion injection.
 
"They’re trying to do something no one else has done, which is to jump-start a sovereign wealth fund with $200 billion," one senior financier, who spoke on condition of anonymity, told I.I. "The people who have that kind of money have been doing this for 10, 20, 30 years."
 
Blackstone shares have fallen by more than 50 percent from the company’s June 2007 initial public offering price, to close at $15.91 Friday.
 
The deal, according to the magazine, was arguably a symbol of C.I.C.’s inexperience. Blackstone senior managing director Antony Leung, a former Hong Kong financial secretary, approached C.I.C. executives about the investment before the fund was formally established.
 
"It has been a black eye for China Investment. It’s a sign of incompetence," says Guan Anping, a Beijing-based securities lawyer with Anjing & Partners and a onetime aide to former vice premier Wu Yi, who was China’s top trade official before retiring in March.
 
Morgan Stanley hasn't fared much better; its shares are down more than 25 percent since January.
 
According to the I.I. article, observers say the Blackstone investment has turned up the heat in a turf war between C.I.C. and the State Administration of Foreign Exchange, an arm of the People’s Bank of China that previously enjoyed a monopoly on managing China’s reserves.
 
C.I.C. executives are sensitive to criticism of the performance of the fund’s early investments, the magazine reports.
 
"Our ultimate investors are the Chinese public," explained Wang Shuilin, a former senior economist at the World Bank Lou recruited to serve as C.I.C.’s head of communications and international relations. "We can’t mess around and make bad investment decisions. We have a huge responsibility, a huge burden on our shoulders."
 
Still, Wang tells I.I., C.I.C. is committed to keeping its Blackstone shares as a long-term investment.
 
"I met Dr. Henry Kissinger recently in the U.S., and he asked if China Investment would sell," says Wang. "I said, 'No, we have confidence in Blackstone. The fundamentals are strong. We haven’t lost money because we haven’t sold.'"