Spreading wealth

Different role

Last year, CIC's board of directors reviewed and approved the 2012-2016 Strategic Plan of Development, which outlines the guidelines for overseas investment. They decided to extend the investment horizon to 10 years and adopted rolling annualized return as an important benchmark to evaluate the performance.

Ding, the current chairman and former deputy secretary-general of the State Council, says that the CIC zeroed in on the endowment model of asset allocation after looking at several such models in the past five years.

"We have developed the policy portfolio to better align and balance our strategic and tactical asset allocation, and to improve portfolio integrity, boost fiscal discipline, and for prudent management," he says.

The major loss of 4.3 percent in CIC's overseas investment projects in 2011, compared with a profit of 11.7 percent in 2010, raised serious doubts over its investment measures and risk control system.

Losses in public equities and direct investment projects was the main reason for the negative return in 2011, when the MSCI World Index dropped 7.4 percent, according to a research note from Zero Power Intelligence Co Ltd, a Chinese market research firm. It indicates CIC's returns are directly related to the performance of the global financial market, the note says.

CIC was launched in September 2007 with registered capital of $200 billion. Of this, $90 billion was transferred to domestic financial institutions through CIC's wholly owned subsidiary Central Huijin Investments, while the balance of $110 billion went for overseas investment. In 2012, the State Council injected another $19 billion into the wealth fund after raising $30 billion in 2011.

Liu Shangxi, deputy director of the Research Institute for Fiscal Science under the Ministry of Finance, says that unlike other sovereign wealth funds, the State Council has clearly specified CIC's duties and functions.

"The main task of CIC is to manage the foreign exchange given by the central government and use it on behalf of the state to invest in overseas markets," Liu says.

More than 49.2 percent of equity purchases have been from the US markets, compared with 27.8 percent in other advanced economies and 23 percent in emerging markets, the CIC annual report says.

CIC also invested 22.3 percent of its fund in overseas financial sectors, while 11.6 percent is in the information technology sector and 10.7 percent in the consumer discretionary industry, it says.

Guo Tianyong, a professor at the Beijing-based Central University of Finance and Economics, says that CIC must maintain "long-term investment" and diversify risks for long-term gains.

"The fund should also emphasize cultivating and retaining talent, as it would help in sound growth of foreign exchange reserves," Guo says.

Though there have been some reports that the Chinese central bank and the State Administration of Foreign Exchange are planning to create a new institution for using the forex reserves for investment. But so far, neither the central bank nor the CIC has given any such indications, experts say.

In January, the foreign exchange administration launched a special office to invest foreign exchange reserves overseas by the way of entrusted loans. Most of the borrowers are enterprises planning overseas expansion.

"CIC faces competition from the State Administration of Foreign Exchange, which is also investing in equities, private equity, real estate and infrastructure to diversify China's foreign exchange reserves," says Barbary, of Sovereign Wealth in London.

"Ideally, there wouldn't be two different funds attempting to fulfill the same role, and an ongoing funding stream would be designated to the single fund. In that way, China might develop a fund like the Government of Singapore Investment Corp. However, given the circumstances, an endowment model is a good option for CIC."

By the end of 2012, China's total forex reserves reached $3.31 trillion, of which 60 to 70 percent were dollar assets. According to the US Treasury Department, China's holdings of US Treasury bonds increased by $25.2 billion in May and the total reached a record high of $1.315 trillion. They rose by $151.9 billion from a year earlier.

Xu Hongcai, a senior financial researcher at the China Center for International Economic Exchange, a government think tank, says it is imperative the CIC diversifies its investments from US Treasury bonds.

"A better choice is to invest in overseas infrastructure projects and support the overseas moves of Chinese enterprises," he says.

With the US likely to taper its quantitative easing policy, Xu believes CIC should sell some foreign equities to cash in on the returns.

"Once the developed countries start to reduce asset purchases, capital may flow out of China and other emerging markets. So the CIC should foresee the potential risks," Xu says.

Ding, the CIC chairman, says there are chances of increased volatility in world markets with major developed economies planning to reduce their quantitative easing programs, thereby posing challenges for institutional investors.

"The subdued global economic recovery, compounded by rising investment protectionism, will cast a prolonged shadow over the outlook for global financial markets," Ding says, adding that CIC will diversify its foreign exchange funds, increase investment in public equities and look for long-term investment targets with stable returns.

"I have every confidence that the solid groundwork laid during the first five years will see CIC through the next five and beyond. We have weathered the difficult times, but we must equip ourselves to embrace new challenges."

The biggest shareholder of CIC is Central Huijin, which handles domestic investment projects. It owns a 67.7 percent equity stake in Bank of China, 57.2 percent in China Construction Bank and 47.6 percent in China Development Bank.

Liu Fanyu, managing director of public relations and international cooperation at CIC, says the wealth fund is in touch with several private firms, such as e-commerce giant Alibaba Group, which is contemplating a public listing.

Some experts feel that to better balance risks, the fund should also scale up investment in the domestic market.

chenjia1@chinadaily.com.cn

 

Above: Gao Xiqing, CIC's vice-chairman, says the fund is interested in long-term returns, not in controlling overseas companies. Below: Ding Xuedong, the chairman, faces a tough challenge in devising investment strategies, experts say. Photos Provided to China Daily

The headquarters of China Investment Corp. The country's sovereign wealth fund reported a 10.6 percent gain on its global investment for 2012. Wu Changqing / for China Daily

( China Daily Africa Weekly 09/27/2013 page1)