China fund buys nearly 1 percent of BP

By Tom Bergin and Alan Wheatley

LONDON/BEIJING (Reuters) - China has accumulated a stake of just under 1 percent in BP Plc <BP.L>, raising fresh questions about Beijing's strategy for investing its huge foreign currency reserves.

A spokesman for BP, Britain's largest company, said it was aware of the Chinese stake, which is worth about $2 billion, and that it welcomed all shareholders.

He declined to name the identity of the investor but The Daily Telegraph said it was the same Chinese state fund that had built up a stake in French oil giant Total <TOTF.PA>.

That fund is the State Administration of Foreign Exchange (SAFE), an arm of the central bank that manages China's $1.68 trillion in currency reserves, the Financial Times reported last week. It said SAFE's stake in Total of 1.6 percent was worth about $2.8 billion.

Analysts say it is unclear whether the purchase of stakes in Western oil majors reflects China's desire to secure energy assets to fuel its booming economy, a drive which has led to big investments in Africa, or simply a case of diversifying assets.

Oil majors such as BP, Total or Exxon Mobil <XOM.N> are usually the largest companies in their home markets, so any investor building a balanced portfolio will find themselves with a big chunk of their money in oil stocks.

BP's weighting on the FTSE 100 <.FTSE> index of the biggest UK stocks is 7.6 pct.

The disclosure of China's investment in BP coincides with a visit to Beijing by Chancellor of the Exchequer Alistair Darling, who has said sovereign funds are welcome in Britain as long as their investments are commercially, not politically, driven.

However, when the Kuwait Investment Office built up a 22 percent stake in BP after the government's share sale in 1987, Britain forced the state-owned investor to reduce this to under 10 percent. Kuwait sold further shares during the 1990s.

BP shares traded up 0.64 percent at 552 pence at 4:23 a.m. EDT, underperforming a 1.64 percent rise in the DJ Stoxx European oil and gas index.

INSTITUTIONAL RIVALRY

Darling is due to meet Premier Wen Jiabao on Tuesday as well as Lou Jiwei, head of China Investment Corp (CIC), a $200 billion sovereign wealth fund that Beijing set up last September to increase the returns on its reserves by taking greater risks.

SAFE talked about diversifying its investments long before the creation of CIC, and He Fan, a researcher with the Chinese Academy of Social Sciences, said it was a good thing for China to have two sovereign wealth funds.

But he said if SAFE continued to expand its investment portfolio, it might eventually threaten the legitimacy of CIC, especially if the latter was unable to generate juicy profits.

"If the return of CIC is, say, only about 5 percent, then the value of its existence will be in doubt," said He.

China is not alone in having more than one sovereign fund.

Singapore, which China has cited as a role model for its reserves management, has both the Government of Singapore Investment Corp and Temasek.

Still, some academics close to Beijing policy makers believe that CIC has been in an awkward position from day one because of rivalry between the finance ministry and the central bank over who should control China's foreign exchange reserves.

"CIC was born as a product of infighting within the government," a think-tanker, who declined to be named, said.

CIC was funded with part of the central bank's reserves. But it is headed by a former vice-finance minister, Lou Jiwei, who has come under fire for the poor performance of his fund's initial high-profile investments in U.S. private equity group Blackstone <BX.N> and investment bank Morgan Stanley <MS.N>.

SAFE, which invests mostly in lower-risk bonds, came on to the equity market's radar in January with reports that it had taken small stakes in Australia and New Zealand Banking Group Ltd <ANZ.AX>, Commonwealth Bank of Australia <CBA.AX> and National Australia Bank Ltd <NAB.AX>.

ANZ confirmed SAFE had bought a stake of under 1 percent.

In taking on more risk, SAFE is encroaching on to the CIC's turf, said Kyle Jaros with Eurasia Group, a New York consultancy.

"China's senior leaders, however, may intend to use competition to incentivise better performance by each agency, and in coming years could divide new foreign exchange surpluses between SAFE and CIC, according to which achieves greater investment success," he said in an April 4 report.

As for the choice of investment, buying into Total and now BP offers a hedge against rising energy costs, as oil breaks records above $112/barrel, and may reduces SAFE's exposure to a declining dollar.

Still, some analysts questioned the timing.

"How will they increase returns by investing in BP at this stage in the cycle?" asked Larry Brainard, chief economist at Trusted Sources, a London consultancy.

(Additional reporting by Zhou Xin)

(Editing by Anne Marie Roantree and David Cowell)