People's Bank of China buys stake in Prudential

China's central bank has acquired a secret stake in Prudential, Britain's second--largest insurer, as part of Beijing's increasingly active plans to deploy its vast pool of foreign currency reserves in overseas markets, The Sunday Telegraph has learned.

The shareholding of about 1 per cent in Prudential is understood to have been bought by the People's Bank of China during the past few weeks, placing it among the British insurer's top 25 institutional investors. People close to Prudential said the stake had been acquired using a nominee account.

There is no indication that the investment has been made as the precursor to any kind of corporate activity, such as a takeover approach. It is thought to be among a number of stakes acquired by the Chinese central bank in large European companies in recent weeks as it sought to take advantage of depressed share prices.

City sources last night named Legal & General and Old Mutual, the insurers, as other companies in which the People's Bank of China had been buying shares.

"It is not just the insurance sector. The Chinese have been buying stakes in a significant number of companies," said one person close to the situation. Banks, resources companies and pharmaceutical groups are among the other industries where falling share prices are likely to have proved attractive in recent months, according to the person.

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Because the shareholdings are below the 3 per cent disclosure threshold, the purchases have not needed to be announced. Prudential declined to comment last night on its new shareholder, but people close to the company said there had been no subsequent contact with the Chinese central bank.

Chinese interest in Prudential's shares is unsurprising. The company has built an impressive business in the fast-growing markets of Asia, while its British and US businesses have remained comparatively unscathed by the credit crisis.

Under the stewardship of Mark Tucker, its chief executive, Prudential is understood to be examining potential bolt-on acquisitions that would enable it to take advantage of the weakened state of some of its competitors.

The investment from the People's Bank of China is the latest in a string of moves by Chinese government entities to pour money into large western companies.

An unidentified fund acquired a stake worth about £1bn in BP, the energy company, earlier this year, while Chinalco, a Chinese aluminium company, bought a large stake in Rio Tinto as part of its efforts to gain a louder voice in the hostile takeover bid by BHP Billiton.

Last year, officials in Beijing established the China Investment Corporation (CIC), a $200bn sovereign fund set up to diversify the country's vast holdings of foreign exchange reserves.

Since then, its investments have included a $3bn stake in Blackstone, the US private equity firm, and a minority stake in Morgan Stanley, the Wall Street investment bank.

In Britain, Barclays has turned to Chinese sources of capital as part of its fundraising rounds last year and earlier this summer. The institution that invested in Barclays was China Development Bank, which has traditionally lent money to finance -infrastructure--related projects.

Analysts believe investments of this type will become increasingly common as Asian companies and governments exert greater influence on the levers of global economic power.

Some shareholdings have met with political resistance in China, however, because of the large paper losses they have incurred as the credit crisis has tightened its stranglehold on the fortunes of Western financial institutions.

[Source: By Mark Kleinman, Daily Telegraph, London, 23Aug08]

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