March 09,2010

CIC Defies Wall Street Shorting Hints, Eyes Overseas China-Linked Assets

By CSC staff, Shanghai

In 2009, as the global financial market began to stabilize, China Investment Corporation (CIC), China's sovereign wealth fund, sped up the pace of its overseas investment and realized a paper gain of more than $10 billion.

While some Wall Street investors are advancing shorting hints concerning a possible China bubble, CIC is considering increasing investment in assets influenced by China factors, Australian mining companies, for example

Short-seller James Chanos of New York-based Kynikos Associates said recently that when China's property bubble eventually bursts it could be bad news for companies in Brazil, Australia and Canada, saying that companies based in those countries are some of the biggest suppliers to China of raw materials.

Asked if he meant companies like Rio Tinto or BHP Billiton, Chanos said, "You're heading down the right track."

CIC, on the other hand, seems optimistic about some of those companies.  Jesse Wang, vice general manager and chief risk officer of CIC, notes that the Australian economy has rebounded rapidly and has recently launched a fourth interest rate hike. He admits that without the strong recovery of China's economy, Australia, a major resource supplier, would not be seeing such rapid growth.

CIC's foreign exchange reserves can not be invested directly in China, so CIC must look outside for its investment possibilities. This creates a dilemma: China's economy is growing fast relative to other big economies, but CIC can not invest in it. Apart from the developed countries and emerging markets, CIC can only give consideration to the "Chinese factor."

CIC has not formally reported its overseas investment income for 2009. A senior CIC official says: "The unaudited book surplus of CIC in 2009 was over $10 billion, and it was not just $10.1 or $10.2 billion."

Based on this, the return rate of CIC's global portfolio (i.e. foreign investment) reached over 10%. It was -2.1% in 2008. According to the 2008 annual report, of its allocation of $200 billion, the overseas investment quota is over 50% for foreign investment of about $110 billion. At present this amount has been nearly exhausted.

In 2008, the international situation was very dangerous, and CIC deliberately slowed down the progress of the investment, putting in only about $10 billion. By the end of 2008, the company still held $96 billion which was not invested. In early 2009, when central banks cut interest rates to almost zero, CIC accelerated asset allocation and invested almost all the money by the end of year.

Since the second half of 2009, China has benefited from investment in North America, Southeast Asia, Central Asia, and Russia, especially in the energy sector.

Jesse Wang says the global economic situation in 2010 will be "the most complex." In an interview with China Business News, he said, "This year the market does not show a clear direction; within a certain range it will significantly fluctuate." CIC will pay close attention to market trends and use a more flexible investment strategy to make adjustments as fast as possible when situations change.

In 2009, CIC's investment in energy resources triggered guesses over its investment preferences. Jesse Wang stressed that the investments in resources and energy are in the end financial investments. He points out the prices of resource-type products increased a lot last year. "I personally believe that the price is now high."

It was rumored late last year that CIC may receive $20 billion of foreign exchange reserves. Jesse Wang says he has not heard this. He says additional allocation is not decided by CIC and is up to regulators.

He says, "If there are no new additional funds, we will cast the remaining funds to carry out re-balanced and tactical configuration, and adjust flexibility to cope with the complexities of market changes. If there are additional funds, we should add it to the overall configuration and adjust our investment strategy."
 

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