Tuesday, August 10, 2010

China-Harvard Connection: A Modest Proposal

During the past twenty years, China has accumulated several trillion dollars of foreign exchange reserves. In 2007, the China Investment Corporation (CIC) was established as a sovereign wealth fund to manage part of China’s foreign reserves. Initially funded with US $200 billion, total assets reached US$ 332 billion in December 2009.

CIC invests in a variety of global enterprises. The Wall Street Journal reported on August 4, 2010, that CIC was negotiating with Harvard University to buy its stakes in several U.S. real-estate funds for about $500 million. Investing in real estate funds is a less visible investment that avoids the political and public-relations backlash from attempts to buy outright large U.S. corporations (e.g., oil giant CNOOC’s offer to buy Unocal Corp, which it later withdrew), or U.S. trophy properties.

Harvard’s interest in the sale is to raise cash by offloading illiquid property assets that suffered large losses following the collapse of the real estate bubble.

Prior to the financial crisis, Harvard was planning a massive expansion into neighboring Allston, a $1 billion, 589,000-square foot science complex to house the new department of stem cell and regenerative biology and program in biologically inspired engineering. Harvard’s new president, Drew Gilpin Faust, was forced to delay the project owing to a near 30 percent loss in the university’s $36.9 billion endowment, which supplied more than a third of the university’s operating budget in 2008-09.

China and Harvard have a win-win opportunity that can serve as a model for joint cooperation in higher education. China could readily fund the Allston expansion for a third of one percent of CIC’s assets. What could China get in return? One possibility is a fixed number of slots, say, 500 to 1,000 a year, of Chinese graduate students at Harvard in fields of special need and interest to China. Both China and Harvard would have to approve the students’ qualifications for admission. China would pay the living costs and tuition of its students.

Harvard could increase its physical capital while China would receive an annual return in an increased number of students earning Harvard degrees. This could serve as a model of cooperation with other U.S. universities for which private and government funding is much tighter for expansion and renewal of physical plant.

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