CIC creates new investment teams, scouts opportunities offshore

As global markets nosedived and its initial investments soured, the China Investment Corporation (CIC) took the opportunity to reorganise its investment operations and focus on less risky investments at home and in Asia. Simon Mumme reports.

The fledgling sovereign wealth fund, founded in September 2007 with US$200 billion in foreign reserves to invest internationally, has scrapped its equity, alternatives and fixed income divisions and created four new arms to sit alongside the strategic asset allocation and research department and report to the chief investment officer, Gao Xiqing.

The public markets department will construct portfolios of investments in equities, fixed income, commodities and cash, and will select external managers to implement these allocations.

Complementing this team, the private markets group will source co-investments and limited partnership in investments such as real estate and infrastructure, while the special investments division will seek out large-scale, concentrated investments with long time-horizons.

A tactical investments department will manage internal portfolios and absolute return strategies in public markets.

According to a statement by CIC, the structural changes are part of a commitment to improve corporate governance and investment strategy, and better seize investment opportunities.

The CIC would not provide the names of the heads of the new divisions or confirm which responsibilities Zhou Yuan, who was recruited from UBS investment bank in China as head of alternative investments at CIC in December 2008, would now have, or whether he remained at the fund.

The fund would also not comment on what had become of the role held by private equity head Hu Bing, who previously ran fixed income and trading at the fund, according to Reuters.

The CIC is currently advertising 15 employment vacancies, for roles ranging for asset allocation and strategic research to equity, alternative and fixed income investment, operations and public relations and international cooperation.

The internal restructuring and recruitment drive started as the financial crisis began to wipe trillions from global markets. Founded to profitably invest existing foreign exchange reserves, the CIC was burnt by its investments in US financial companies at the outset of the turmoil, and seems to have largely withdrawn to carry out internal work and focus on domestic and regional investments.

However in mid-April, CIC chairman Lou Jiwei talked of the fund’s interest in investing in Europe.

This followed earlier comments by CIC deputy general manager Wang Jianxi in the China View that the fund saw opportunities in the global market but was mulling how to exploit them given the political sensitivities surrounding investments by sovereign wealth funds.

Jianxi repeated that CIC’s investment aims were purely financial and that it invested passively in companies and altered its strategy according to market conditions. The CIC website states that the fund “does not seek an active role in the companies in which it invests”.

This passive approach, combined with developed economy businesses’ desperate thirst for cash, could help sweep away some of the objections to Chinese investment abroad.

But Jiwei’s comments about Europe do not necessarily mean the international investor will immediately begin to hunt for bargains in the region, according to the Economist Intelligence Unit.

Large overseas investments could now become less important for the fund because the downturn in exports has made rebalancing China’s capital flows a less urgent task – one that was indirectly served by the CIC’s offshore investments.

Now that the US consumer had turned thrifty (or jobless), foreign exchange inflows have backed off. Furthermore, the food and oil price shocks of last year have settled down as inflationary pressure continues to ease. This has made balancing foreign currency inflows a lower priority than earning good returns by investing them.

Amid its internal activity the CIC has moved to invest in less-risky assets. In September 2008 and January 2009, it reportedly bought considerable chunks of domestic bank shares. According to China Daily, a state-run newspaper, the CIC holds equity stakes of US$22.5 billion in China Construction Bank, US$22 billion in the Bank of China and US$22 billion in the Industrial and Commercial Bank of China.

In March it pursued an A$3 billion investment in Australian iron-ore producer Fortescue, according to Bloomberg. But Chinese steelmaker Hunan Vail Iron & Ore eventually secured a stake of about $1 billion in the miner by April. Media reports also suggest that the CIC would be interested in buying a stake in New Zealand dairy giant Fonterra if it amended its capital structure.

Despite the easing of capital flows from exports, China will still have large reserves that the CIC will seek to diversify, and these investments will potentially attract controversy, despite Jiwei’s reaffirmation in April that it would abide the Santiago Principles for sovereign wealth funds, which it helped to compose.

Sub-principle 1 of the 19th Santiago Principle states: “If investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed”.

Jiwei’s efforts to present the CIC as a responsible investor are “part spin, designed to reduce foreign opposition to the firm’s investment plans,” according to the Economist Intelligence Unit. But they also flag the CIC’s intention to err on the side of making cautious and uncontroversial investments for the next few years, if not longer.

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