China wealth fund sees sure thing in 'more bubbles'

Section:

China Investment Corp. Wealth Fund Muscles Up as Markets Recover

By Zhou Xin and Alan Wheatley
Reuters
Friday, August 28, 2009

http://www.reuters.com/article/ousiv/idUSTRE57S0D420090829

BEIJING -- China Investment Corp. is investing as much overseas each month this year as it did in all of 2008, Lou Jiwei, the chairman of the $298 billion sovereign wealth fund, said on Saturday.

CIC is counting on handsome returns this year and might one day ask the government to hand it more of the country's record hoard of foreign reserves to manage, Lou, a former vice finance minister, said.

The fund invested just $4.8 billion outside China last year as it kept its powder dry during the global financial crisis, when asset prices tumbled. It held fully 87.4 percent of its overseas investments in cash or cash equivalents.

Now that markets are recovering, CIC is constructing a broad-based portfolio, Lou told reporters on the sidelines of a forum organized by the Washington-based Brookings Institution and the Chinese Economists 50 Forum, a Beijing think tank.

CIC posted a negative 2.1 percent return on its global investment portfolio last year as the value of stakes such as those in Wall Street bank Morgan Stanley and private equity giant Blackstone Group (slumped.

But Lou said 2009 was shaping up better.

"It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we're just taking advantage of that. So we can't lose," he said.

CIC was set up in September 2007 with $200 billion of foreign currency reserves transferred from the central bank, which manages its own stockpile of $2.13 trillion.

"If our returns are not bad and the state's FX reserves are still rising, we may go and ask for more," Lou said.

He said the risk of a decline in the dollar risks was more of a national issue for China than for CIC because its capital is in dollars.

Asked whether CIC would be a keen buyer in the United States, Lou said CIC can buy anywhere in the world, but it cannot avoid buying U.S. assets because the American economy and capital markets are so large.

Lou said CIC was building a broad investment portfolio that includes products designed to generate both alpha and beta; to hedge against both inflation and deflation; and to provide guaranteed returns in the event of a new crisis.

"We have to be in everything because you never know what's going to happen in this world," he said.

As well as investing overseas, CIC controls Central Huijin, a company that holds the state's shares in big commercial banks. The increase in the value of these stakes is the reason why CIC's assets had soared to $298 billion by the end of last year.

Lou said he expected returns from Central Huijin to decline in coming years because domestic banks profits will come under pressure as their net interest margin shrinks.

Moreover, banks will have to bolster their capital base by issuing subordinated bonds or equity, diluting Huijin's returns, he said.

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