The story of China Investment Corp’s (CIC) recent purchase of 17 percent of Canada-based global mining powerhouse Teck Resources (TSX: TCK/B, NYSE: TCK) is notable for many reasons: it’s another manifestation of China’s relative strength; the terms of the deal suggest China understands the sensitivity in the West to state involvement in the private market; and it’s further reminder that China will play a significant role in the world’s and Canada’s economic future.

Followed by CIC’s allocation of USD500 million to Blackstone Group LP and purchase of a 40 percent stake in asset manager Citic Capital Holdings, it’s a sign, too, that sovereign wealth funds (SWF), China’s at least, are back in business.

SWFs have become part of the global financial landscape during the last two years, the burst of suspicion they inspired in 2007 blending in amid the outright fear of the financial and economic crises.

In fact, these vehicles quickly evolved into “potential savior of” from “potential threat to” capitalism as liquidity concerns ratcheted up through 2008.

What we now label a “sovereign wealth fund” has existed since 1953, when the Kuwait Investment Authority was created. Such vehicles have sprung up in places like Singapore (Government Investment Corp, or GIC, and Temasek Holdings), the United Arab Emirates (Abu Dhabi Investment Authority) and Norway (Government Pension Fund-Global). Even Alaska has one (Alaska Permanent Fund).

As defined by the US Treasury, SWFs are government investment funds, funded by foreign currency reserves but managed separately from official currency reserves. Basically, they are pools of money governments invest for profit. Often this money is used to invest in foreign companies. What stoked concern a couple years ago was the country of origin of the new wave of SWFs and the new ways they invested.

The early-2000s surge of petroleum-and-exports-generated foreign reserves led to the rapid proliferation of state-run investment vehicles in the Middle East and Asia. Around this time SWFs shifted from bond and index funds to assets that carry greater risk–hedge funds, derivatives, leveraged buyout firms, real estate. The Washington Post reported some were big speculators in commodity futures markets. And funds based in Bahrain and Dubai have taken steps unusual among SWFs, leveraging themselves to make bigger overseas acquisitions.

The International Monetary Fund (IMF) estimated in September 2007 that SWFs controlled as much as USD3 trillion and that that figure could balloon to USD12 trillion by 2012, though the total amount held by SWFs declined significantly during the economic turmoil and commodity-price bust of 2008-09.

Some economists and political analysts argue that these funds will help nations dependent on natural resources to diversify their economies. Others worry about abuses of power and urge greater transparency at SWFs.

With ample investment capital, these upstart SWFs were seen as sources of new capital for weakened financial institutions as the first cracks in the Western system appeared in late 2007.

Analysts concerned that the “patient capital” of capitalist authoritarian states would cause their SWFs to act in more strategic–and potentially more profitable–ways must now contend with recent evidence of the advantages of this long-term focus: SWFs can hold large positions for extended periods, riding out short-term panics and downturns and providing stability to markets.

Even as Congressional committees met and international institutions deliberated, SWFs stepped in with capital to prop up already weakening Western financial firms. In May 2007, CIC, not yet officially constituted, made its first investment in non-voting shares, valued at USD3 billion, in Blackstone Group. Later, in December 2007, CIC acquired 9.9 percent of Morgan Stanley (NYSE: MS).

Others, including Abu Dhabi Investment Authority, Singapore’s GIC and Kuwait Investment Authority, combined to pour nearly USD50 billion into Western financial firms to mitigate the impact of the subprime-catalyzed meltdown.

For the companies being purchased, and the countries in which they are located, capital inflows can be positive. SWF investment in Western banking giants came at a time when liquidity was desperately needed, when global credit was stretched thin and the financial sector was struggling.

Many SWFs have suffered along with most market participants in this recession, and most continue to keep their powder dry. But one, China’s, is back in business.

Unlike the oil-rich nations of the Middle East, China is again seeing its foreign-exchange reserves swell. As its economy recovers, capital has flooded in. In the second quarter its reserves grew by a record amount, reaching USD2.1 trillion. China didn’t have to dip into its substantial stock of reserves during the crisis, and CIC is funded by these ever-growing foreign exchange reserves. It essentially has to deploy capital so its coffers can be re-filled.

CIC’s ability to rebound quickly is further aided because it wasn’t fully invested ahead of the meltdown. CIC has fewer wounds to lick than most, despite complaints back home about its performance. Many longer-established funds would be envious of its losses last year, which were just 6 percent according to informed estimates.

In a working paper published in January 2009, Brad Setser, then of the Council on Foreign Relations (CFR), and Rachel Ziemba of Nouriel Roubini’s RGE Monitor, estimated that the SWFs and foreign-currency funds of the Gulf Cooperation Council (GCC) lost about 27 percent of their assets, or USD350 billion, in 2008. The Abu Dhabi Investment Authority’s portfolio shed 40 percent of its value in 2008. The paper only makes estimates for the Gulf region but notes that other countries, including Russia and Norway, also saw significant losses in the funds through which they manage foreign assets. And Singapore’s Temasek announced July 29 that the value of its portfolio had slid by more than a fifth in the year to March.

China now holds more than USD2 trillion in foreign exchange reserves. That’s a lot more than it needs to meet day-to-day liquidity requirements. In October 2007, CIC was given USD200 billion of the Middle Kingdom’s huge and ever-growing foreign exchange reserve (when CIC debuted, China held USD1.4 trillion) for overseas investment.

China is well aware of the West’s suspicion of state meddling in markets, and the terms of its deal with Teck reflect this awareness. CIC will have no board representation, and, though its stake is 17 percent, it’ll only vote 7 percent of the shares. It bought the shares at a mere 7 percent discount to the market price, despite the fact that CIC was in effect throwing a lifeline to Teck, which had run up excessive debts after purchasing Fording Canadian Coal.

Moreover, thanks to the lengthy negotiations that attended the deal, Teck’s price has sharply recovered. When talks about a deal began during the winter, Teck’s stock price was on the floor; it has now tripled.

CIC explicitly stated that it’s acquiring its Teck shares “for investment purposes as a long-term passive financial investor.” The SWF also agreed to hold the purchased shares for at least one year following closing.

But with CIC’s assistance, Teck has strengthened its balance sheet by paying down part of the remaining debt from its acquisition of Fording. This, like the investments in Western financials, is a mutually beneficial deal.

China is hungry for resources. And many of CIC’s acquisitions reflect underlying needs of the domestic economy: It needs to guarantee supplies of a lot of stuff to keep growing. That alone will help Canada, if only indirectly. Resource prices will rise if rising incomes coalesce into an acquisitive Chinese middle class. The more money people make, the more they spend, on things such as cars.

CIC, endowed by its government with USD200 billion, is buying mineral and mining companies for two reasons. First, CIC deployed as much as half its cash to rescue Western banks in late 2007; needless to say, those investments didn’t work out so well. Now, with the worst of the credit crisis behind us and economic recovery at least in reasonable sight, CIC is simply diversifying its portfolio.

Second, China wants to secure sufficient raw materials to sustain its economic growth. Indeed, the world’s largest consumer of mineral resources is fast becoming a key source of mining capital for Canadian companies, large and small. This reality was underscored when CIC purchased its stake in giant Teck and when a major state-run Chinese mining company  entered discussions with Toronto-based Allana Resources (TSX.V: AAA) to build a potash mine on Allana’s property in Ethiopia’s Danakil Evaporate Basin. The Chinese have also agreed to buy up to a 19.99 percent share position in Allana. Potash mines have extremely high start-up costs, typically in the neighborhood of CAD3 billion. But Allana’s suitor has deep pockets.

CIC wasn’t fully invested prior to the crisis, limiting its losses. It is now clearly shifting out of cash and money market funds into various “risk” assets. And if China’s government decides it wants to hold more market risk, it could easily redirect some of its new reserve growth into the fund.

The amount of money available for investment in risky assets by major sovereign investors is the most important concept; it really doesn’t matter that much if the investment is managed by a central bank or a sovereign fund.

CIC’s deal with Teck is another demonstration of the complex interdependence of the Pacific Rim with the North American economy. It’s the single biggest investment by a Chinese entity in a Canadian company.

And it was a coup for Teck to secure CIC’s investment for 17 percent of the company with a guaranteed lock-in period of 12 months. The deal not only brought in much needed cash for the debt-laden company, but also a formidable partner with connections in the markets that will drive demand for Teck’s production of metallurgical coal and other minerals. This deal alone has quadrupled the stock of Chinese foreign direct investment in Canada.

The deal sailed through with no interference from government authorities; Industry Canada didn’t deem it necessary to review the transaction under the Investment Canada Act, which had been amended recently to single out investments by foreign state-owned companies and to take into account “national security” considerations.

The CIC-Teck deal has also come at a critical time in Canada-China relations. The Conservative government is making a serious effort to repair a relationship that got off to a rocky start in 2006. The visits to China earlier this year by Trade Minister Stockwell Day and Foreign Minister Lawrence Cannon were reciprocated by Chinese Foreign Minister Yang Jiechi. Transport Minister John Baird visited China in July, and Prime Minister Stephen Harper has confirmed that he’ll likely visit in the fall.

Two-way investment will be central in the next chapter in Canada-China relations; the two governments must promote and facilitate capital flows in both directions. In the post-crisis economic landscape, China will emerge as a major source of long-term capital, and not just a major destination. The CIC-Teck deal demonstrates that Canada can be at the nexus of these flows.