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28 May 2023

China's wealth fund sets out its stall

By Agencies


China Investment Corp may still be operating out of makeshift offices, but with its $5 billion investment in Morgan Stanley the contours of the infant sovereign wealth fund's strategy are becoming clearer.


Analysts say CIC, as it has consistently stated, seems to have its eye on the bottom line rather than on building up stakes in sectors that are politically sensitive to host governments.

"We think their focus is on getting the best return from their investment rather than some strategic design," said Andy Rothman, investment bank CLSA's Shanghai-based China strategist.

"I think this is going to be as returns-focused as a Fidelity or a T. Rowe Price in the United States. I don't think they're going to be looking to use the sovereign wealth fund to buy copper mines or oil companies or things like that," he said.

To be sure, it's early days to draw sweeping conclusions about CIC's intentions. The fund was set up on September 29 and the government has just completed its initial $200 billion funding.

The agency is in the early stages of recruiting both in-house professionals and external fund managers: Thursday was the deadline for applications to run an undisclosed amount of money in four international equity classes -- with demanding rate-of-return targets.

CIC is in a hurry. For a start, Lou Jiwei, the fund's head, says he needs to earn 300 million yuan ($41 million) a day just to cover the cost of the bonds issued to finance the agency.

Second, juicy opportunities thrown up by the U.S. subprime mortgage crisis, like the chance to invest in Morgan Stanley need to be seized now.


Gary Parr, deputy chairman of investment bank Lazard, which advised CIC on the Morgan Stanley deal, said he expected a number of other financial companies that have taken big writedowns to seek capital from sovereign funds between now and February.

"They were overexposed to these asset classes and they're taking hits," Parr told Reuters in New York.

The temptation for CIC must be to rush into deals.

In May, at the top of the credit cycle, it took just three days to negotiate a direct $3 billion pre-IPO stake in Blackstone Group that gave it no protection against a subsequent 20 per cent-plus slide in the private equity firm's share price.

The Morgan Stanley investment suggests CIC has learned the lessons, helped of course by the deterioration in financial markets. The deal took longer to mature and is structured so that CIC is guaranteed a 9 per cent annual return until it converts its investment into equity in 2010.

Moreover, by pledging to be a passive investor with no seat on the investment bank's board, CIC quickly won the blessing of influential U.S. lawmakers. That is a far cry from the political backlash that doomed Chinese state-owned oil firm CNOOC's $18 billion bid for U.S. rival Unocal in 2005.

Geoffrey Yu, a foreign exchange strategist at UBS in Singapore, said the current climate gave China a once-in-a-decade opportunity to acquire more U.S. icons. But CIC had to move fast.

"Once the credit crisis eases and the U.S. economy regains some of its muscle, top U.S. firms may no longer welcome sovereign approaches. Moreover, the U.S. Congress could well resort into a less charitable mood," Yu said in a client note.


A third of the $200 billion initially entrusted to CIC is earmarked for overseas investments, so it has some $60 billion to play with. Where else is the fund likely to place its bets?

"The auto industry would be one needing capital," said Sean Darby, a strategist at Nomura Securities in Hong Kong. "Equally, some insurance companies might fid themselves under pressure as well."

Donald Straszheim, vice-chairman of Roth Capital Partners in Newport Beach, California, said CIC is looking at other major U.S. commercial banks, money managers and securities firms whose share prices have been beaten down to multi-year lows in the credit crunch.

"CIC is also likely eyeing passive stakes in various other U.S. industries where learning from the best would be useful to China's economic advance -- package delivery, rail transport, trucking and airlines to highlight just one sector," he said in a report.

Straszheim said CIC bought into Blackstone less for the expected investment return than for the chance to learn about the private equity business, which Beijing deems crucial for China's economic development.

Rothman at CLSA sees things differently.

Investments such as that in July by China Development Bank in Barclays <BARC.L> may have a "strategic" component, just as China's big banks sought know-how as much as capital when they sold pre-IPO stakes to foreign rivals.

But CIC's motives, Rothman said, are less complicated.

"My guess is that these investments are not about training and expertise. They're trying simply to get the best return," he said. (Reuters)