March 30,2010

China's Sovereign Wealth Funds Look for New Money, More Overseas Investment

By CSC staff, Shanghai

China Investment Corporation, one of China's sovereign wealth funds (SWF), has spent the past year intensively expanding its overseas portfolio. Alas, its capital stash of US$200 billion is proving inadequate to quench its thirst for more overseas deployment of funds.

With the yuan expected to appreciate and with foreign exchange reserves ever increasing, China's two SWFs, CIC and Social Security Fund, are looking overseas to diversify China's reserve assets, at present concentrated in US dollars.

Meanwhile, the two government sponsored agencies are also using their funds to pick up assets for the state to help it maintain control, especially of state-owned banks and enterprises that have gone public.  

CIC is lobbying for another $100 billion entrusted from foreign exchange reserves under its management. Huijin, the state-owned financial institution stake holding company under CIC, is seeking to issue 190 billion in yuan-denominated bonds to inject capital into the Export-Import Bank of China and China Export & Credit Insurance Corporation (Sinosure), as well as to strengthen the capital base of the Industrial and Commercial Bank of China (ICBC), Bank of China (BoC), and China Construction Bank (CCB).

The proposals from CIC and Huijin are making their way through the approval procedure, and have stirred debate among the related departments inside the State Council. CIC before tried to get US$200 billion more from the Ministry of Finance but failed.

CIC spent an aggressive second half of last year, betting on a number of overseas deals mainly related to resources and commodities, and is close to the bottom of its capital well. CIC Chairman Lou Jiwei has said publicly that he is applying to the central government for more money. Wang Jianxi, CIC deputy general manager and chief risk officer, boasted that in 2009 the return rate was two digits and "most of our funds were deployed as planned and the money left is limited."

2009 saw China's foreign exchange reserves increase by US$453.1 billion to US$2.4 trillion, 30% of the world total. Since China will keep its trade and capital surplus, and the yuan is expected to appreciate, the ever-ballooning reserves make diversification of reserve investment especially urgent. 

The wild surge of credit in 2009 has caused a decline in the capital adequacy ratio of state-owned banks. Under Chinese banking regulation, ICBC, BoC, and CCB, as well as other commercial banks, are in need of refinancing.

ICBC, BoC, and the Bank of Communication (BankComm), all listed in both mainland China and Hong Kong, have released their plans to raise money in both the A- and H-share markets. ICBC and BoC will issue convertible bonds in the A-share market and issue shares of no more than 20% of their respective total H share capitalization. BankComm will sell 1.5 share for every 10 shares of its stock held for 42 billion yuan.

CCB's refinancing plan has so far been stymied by Huijin, which injected $15 billion, $22.5 billion, and $ 22.5 billion into ICBC, CCB, BOC, respectively, to gain controlling stakes in the big three. The Ministry of Finance also holds stakes of state-owned commercial banks. For the first round of refinancing since the banks' IPOs, Huijin is concerned that its stakes will be diluted if it does not put in more money. To maintain control of the banks, either or both the Finance Ministry and Huijin need to raise their stakes.

While CIC is testing the winds, another government-sponsored agency, China Social Security Fund (SSF), is preparing for its own foray into overseas investment. 

SSF has promised to put 20 billion yuan into China Development Bank and 15 billion into the Agricultural Bank of China, over and above its investments in BOC, ICBC, BankComm of 10 billion yuan, 18billion yuan, and 10 billion yuan, respectively, during the banks' IPOs.

So far 200 billion yuan has been prepared for SSF to invest in real projects. Under the State Council's guidance, SSF can invest no more than 10% of its funds in private equity and 20% in commercial entities.

While SSF focuses due to prudence on state-owned enterprises, SSF Chairman and former governor of the People's Bank of China Dai Xianglong said SSF is talking with a number of foreign private companies and private equity investment firms. Yuan appreciation will prompt SSF to increase its overseas investment from 7% to 20% of its funds. 

SSF, the last resort of China's pension system, is looking for more sources of money to stop the pension funding gap for the looming rapid aging of China's population. Besides the proceeds from state-owned enterprises selling stakes, SSF is also looking for cutting a fixed percentage from the extra fiscal income, issuing 20 year bonds, and cutting some percentage of profits from SOEs. Dai Xiaolong expects a 2 trillion yuan SSF in 2015.

 

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