China’s CIC goes public with investment strategy

China Investment Corporation has for the first time revealed its investment strategy. SONIA HAN reports that the Chinese sovereign wealth fund has accelerated its investment program in open-market products and industries such as mining, energy and real estate. The CIC is seeing value after the crisis but is also looking to limit portfolio risk.

CIC has invested half of its US$110 billion freely investable capital in the overseas market, mainly in publicly traded assets, its chief executive said yesterday.

Lou Jiwei, who is also the sovereign wealth fund’s chairman, said: “At the moment, the returns are not bad, but [I] dare not say they will be good at the end of the year. We’re preparing for rebalancing and hope to get better returns to set up the foundation for future continuous development.”

He was speaking at the 2009 Tsinghua Management Global Forum in Beijing.

Last week, in his first interview with the Chinese-language “People’s Daily” Lou said: “After the global financial crisis and the asset price bubble burst, stock and commodity prices swung back rationally and, therefore, they have long-term investment value.

“In 2009, CIC caught the favourable opportunity of market stabilization, accelerated investment pace and intensity,  (so we) included direct investment in open-market products and in the mining, energy and real estate industries, by diversifying investments and asset types and limiting the overall portfolio risk.”

CIC ramped up investments in commodity-related companies this year, including a new $700 million deal in Iron Mining International and the $500 million investment in SouthGobi announced on Monday, a Canada-based company with mining assets in Mongolia.

According to the “People’s Daily” report, during the global financial crisis CIC slowed down its investment pace deliberately and largely avoided having big investment losses.

Coupled with the annual dividend from its wholly owned subsidiary Central Huijin Investment, CIC achieved 6.8 per cent return on its capital over the past 12 months.

Central Huijin also injected capital into state-owned financial institutions to help their restructuring, including China Everbright Bank, China Development Bank, Agriculture Bank of China, China Reinsurance Corporation, and China Galaxy Financial Holding. Central Huijin ensured the stock price stability of ICBC, BOC and China Construction Bank after overseas strategic investors cut down their share holdings due to the global financial crisis.

“As of today, our overseas investments have achieved good returns,” Lou said.

Earlier this month, CIC completed the settlement for its $150 million Phase I investment in 45 per cent of the equity in Nobel Oil Group, based in Russia. CIC will also invest another $150million within nine months for acquiring and developing oil reserve assets in close proximity to Nobel’s existing oilfields.

At the end of September, CIC completed a $939 million transaction to buy 11 per cent of the Global Depositary Receipts of a Kazakh oil and gas firm, JSC KazMunaiGas Exploration Production, through Fullbloom Investment.

In its efforts to cope with the global financial crisis, CIC also adjusted its investment front-desk functions to improve investment efficiency, based on different requirements of asset classes, market segments, investment methods and risk management.

“CIC’s investments are driven by research and asset allocation and it will continually adjust its investment focus according to the international economic situation and financial market changes,” Lou said.

The fund originally recruited three of the world’s leading asset consultants to advise it on strategy and implementation: Watson Wyatt, Cambridge Associates and Mercer Investment Consulting. However, it has built up internal staff considerably in the past 12 months and the precise nature of its relationships with consultants remains unclear.

CIC was established as a wholly state-owned company in Beijing two years ago with $200 billion of China’s foreign exchange reserves. Its overseas investment portfolio is mainly composed of equity, fixed income and alternative assets, in both developed and emerging markets.

Lou said yesterday that as some fundamental problems of the global financial market remained unresolved, he could not rule out the possibility of a “second dip” in the global economy. “Who knows about the future? In that case, we will seek to exit from these offshore investments as soon as possible,” he said.

“The reason for us to increase investment in commodity-related assets and the real estate industry is to hedge against anticipated medium and long-term inflation and a fall in major currencies to a new balanced point,” he said.

“Also, we are not allowed to invest in the Renminbi area (done through Central Huijin) but we want to share the fruit of China’s economic growth. Commodity prices and China’s economic growth are highly correlated so we should have a proportion in that.”

Lou denied speculation of CIC’s investment strategy change. “Outsiders see our big volumes of direct investments in mining, energy, real estate and other industries and think CIC has made some big adjustment in our allocation strategy. In reality there have been no significant changes in our overall strategy,” he said.

“What is not seen is [what we do] through open markets – of which a big portion is mainly entrusted to external fund managers – because it does not have to be disclosed. Of course, as we gain more experience we will gradually increase the proportion that we invest ourselves.”

Lou said it was the right time to invest in commodities. “They did not have long-term value before the financial crisis. They were the typical bubble asset. Now the bubble has burst, lots of companies have long-term investment value. In 2006 and 2007 those firms expanded dramatically and suffered a lot in 2008. This gave us a chance,” he said.

CIC had planned to allocate only about a third of its initial $200 billion in capital for overseas investments. According to its 2008 annual report, the fund invested $3 billion in The Blackstone Group, $5.6 billion in Morgan Stanley and $120 million in various small investments in 2007 and an additional $4.8 billion in 2008. By the end of 2008, CIC outperformed many big sovereign wealth and pension funds, reporting a -2.1 per cent global portfolio return.

According to China Realtime newswire, Lou said the overseas market was large, the liquidity was strong and the efficiency rate on asset allocation was the highest via investment in financial products.

“Some people say that we should make substantial direct investments. We did some of that this year. The timing of the announcements were relatively concentrated, but in fact [they took] about half a year. If the $110 billion is all done this way, there’s no way [for us] to do it, there is no efficiency,” he said.

According to China Daily, Li Xiaogang, director of the Foreign Investment Research Center at Shanghai Academy of Social Sciences, said at the forum that this was the best time for sovereign funds to ramp up overseas investments as the global economy was picking up and the global asset prices were returning to reasonable level.

Lou responded that CIC’s investment strategy was not driven by a national agenda of controlling global resource assets. “Our strategy is to seek long-term risk-adjusted returns. In short, to make money. I don’t care how many tons of oil we can ship home, what I do care about is whether the stock price is valuable,” he said.