By Richard McGregor in Beijing

The head of China’s new sovereign investment fund, Lou Jiwei, has a gentle rejoinder for the foreigners flooding his office with potential deals after his fund’s surprise purchase of a stake in Blackstone, the US private equity group.

With the Blackstone purchase, a $3bn (€2.2bn, £1.5bn) pre-listing deal cut in June when the fledgling company did not even have an office, Mr Lou likened himself to a hunter with an opportunist eye for the quick kill.

But in future, according to foreign dealmakers, Mr Lou says he will see himself managing the fund more like a farmer, tilling the soil for sustainable, steady returns. The soothing rural metaphor conjures up the kind of non-threatening image the fund, charged with investing a portion of China’s $1,330bn in foreign exchange reserves, wants to cultivate among foreigners and locals alike.

The fund has been deluged with ideas in China of how to use the money, with top government leaders suggesting it be spent on raw materials, such as oil, and also beset by criticism over the Blackstone deal.

The fall in the Blackstone share price since its initial public offering provoked a torrent of vitriol on the internet from Chinese who said the fund had lost money earned through the “sweat and toil” of ordinary people.

More ominously, senior leaders have privately expressed anxiety about Blackstone’s share price, even though with a four-year lock-up period any losses are only on paper at this stage.

“[These critics of the fund] do not have a profound understanding of financial issues,” said a close adviser to the fund, who insisted on anonymity.

Jesse Wang, a senior official at the new fund, defended the Blackstone purchase, telling reporters at conference over the weekend that the US company was “currently excellent in terms of both quality and earnings performance”.

The fund is also running into unforeseen head winds offshore, with politicians in the west questioning whether such sovereign funds should be barred from local capital markets until they can convince regulators they are not following an overtly political agenda.

China’s fund has yet to decide what accounts it should publish, according to an official familiar with its internal debates.

But Mr Lou and colleagues have had a consistent message for the foreign fund managers, bankers and consultants at meetings in Beijing: their sole aim is to secure a financial return on their investments.

China’s reserves are now conservatively managed by an agency under the People’s Bank of China, the central bank, with most of the money in US Treasury bonds and government-backed mortgage securities.

The new fund will focus on portfolio investment, taking relatively few direct stakes in companies, as it did with Blackstone. In the short term, the fund is unlikely to buy directly raw materials, the adviser said.

When it does finally formally open its doors for business in one or two months’ time, the fund in any case is expected to ramp up its operations slowly.

The fund will have about $200bn under management, obtained by the issuance of bonds by the finance ministry, through intermediary agencies, to the People’s Bank of China, the central bank, which has the reserves on its books.

But a substantial part of those funds will be used to buy the holdings of Central Huijin Investment, an existing holding company under the central bank.

Huijin, the vehicle used in recent years to recapitalise and then list offshore three of China’s largest state banks, will become part of the new investment company. The price the new fund will have to pay to subsume the assets of Huijin is just one of many thorny issues that have delayed the establishment of the body.

Underlying many of the disputes is institutional friction between the People’s Bank of China and the finance ministry, which have jostled for control over the reserves and their management.

Arthur Kroeber of Dragonomics, a consultancy in Beijing, calculates that after buying out Huijin’s assets, which include a number of forthcoming capital injections, the fund will have only about $72bn of new money left to invest.

“Even with increased funding, the fund is unlikely to exert a meaningful influence on global markets for some years to come,” Mr Kroeber said.

The dominance of Huijin’s assets also means that, for the moment at least, the fund “looks to be more an instrument of China’s industrial policy than a true international investment fund”.

Another reason for the fund’s slow start is a lack of skilled staff. The fund has made one high-profile hiring, Gao Xiqing, a long-time financial bureaucrat and former Wall Street lawyer, but building a large team with global investment experience will take years.

In the meantime, Mr Lou tells visitors, he may be settling into investment life with the philosophy of a farmer but he plans to keep a gun on hand, in case he needs to go hunting again.

What are sovereign wealth funds?

Sovereign wealth funds are set up by states with surpluses to invest, often from oil receipts. Generally separate from a country’s foreign exchange reserves, they invest in equities, bonds and property. Some take a more aggressive role as private equity operators. Morgan Stanley estimates that $2,500bn is managed by the 25 or so largely opaque funds, more than the entire hedge fund industry.

Copyright Fund China 2008.

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