Foreign investment funds: vultures or St. Bernards?

China -- through government-controlled China Investment Corp. -- will soon own a nearly 10 percent stake in the U.S.'s second-biggest investment bank, Morgan Stanley, thanks to $9.4 billion in writedowns on investments linked to bad mortgages.

China Investment Corp -- which has only existed for about three months -- is providing a $5 billion cash infusion, the Associated Press reports. With $200 billion to play with, the Chinese fund is one of the biggest in the world, also owning a stake in Blackstone Group. 

No shame for Morgan Stanley, perhaps, since Citigroup -- the nation's first-biggest investment bank -- had to lean on the Abu Dhabi Investment Authority last month for $7.5 billion.

China and others major exporters of goods to the U.S. (name any member of OPEC) became big behind-the-scenes players in mortgage financing during the housing boom, through their purchase of U.S. Treasurys and mortgage-backed securities.

A recent UC Berkeley study found Chinese investors hold about 9 percent of U.S. Treasuries, 5 percent of agency bonds and 3 percent of agency MBS -- investments that helped push down mortgage rates by 0.5 percent to 1 percent. Middle East oil exporters have also been big bond and MBS investors.

Now, it may be that these foreign investment funds -- backed by countries that desperately need U.S. consumers to continue spending like there's no tomorrow -- just see a great investment opportunity. But they might also be acting to protect other investments by propping up credit markets.

Either way, the Financial Times opines, foreign investment funds are "more like friends in need" than "shady puppet-masters," and their investment in western corporations shouldn't be cause for worry.

"Sovereign wealth funds should usually be welcomed when they seek stakes in western companies, troubled or otherwise," the Times commented Monday, after Dow Chemical entered into a joint venture with Kuwait's state-run oil company.

With the turmoil in financial markets, "we should fear too little sovereign investment, rather than too much," the Times editorialized. The owners of these funds "are not fools. Do not expect too many injections of capital into western banks until they look more deserving of the money."

In that context, maybe China Investment Corp.'s investment in Morgan Stanley suggests that the worst is behind it (the bank says its $1.8 billion worth of remaining subprime mortgage exposure as of Nov. 30 is down from $10.4 billion at the end of August).

Then again, China has more $100 billion invested in mortgage-backed securities issued by Fannie and Freddie, and something on the order of $400 billion in U.S. Treasuries. Maybe the decision makers at China Investment Corp. also think the Federal Reserve and European Central Bank need a little help providing liquidity to banks.

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