China’s four main sovereign wealth funds are in a position that the entire world should envy. They were let off relatively easily while global stock markets crashed, and are now standing strongly with hundreds of billions of dollars in highly liquid assets. Unlike the plethora of institutions that are treading water, these funds are looking for opportunities amid the wreckage, and there are plenty around. This could be the year when the Chinese funds truly flex their muscles and make some major acquisitions abroad. However, there is just as likely a possibility that they will continue forwards in their staid, quiet and conservative strategies.
Unfortunately for foreign asset managers looking to win mandates from these behemoths, some of the sovereign wealth funds (SWFs) began venturing abroad with their money right before the financial crisis hit. Several of these investments fared poorly, and they are now proceeding even more cautiously with new investments. Yet the trends still indicate these funds will gradually come out of their shells and present managers with huge opportunities to win new business.
China’s largest SWF is the State Administration of Foreign Exchange (SAFE) whose assets of $347bn (€246bn) are managed by the SAFE Investment Company. The third largest SWF in the world, the fund manages the country’s foreign exchange reserves. China’s reserves are estimated to be far larger than the fund, at reportedly over $2,000bn. The SWF began investing abroad in 2005 and is allowed to allocate only 5 per cent of its assets in foreign equities. The rest of its assets are in government bonds, foreign exchange and money market vehicles. Many do not even consider it a SWF as its objectives are fairly different and it is exceedingly difficult for foreign managers to win what few mandates it offers.
The most recently established Chinese SWF, and another that for the moment is difficult for foreign managers to access, is the $1bn China Africa Development fund (CAD). The SWF is essentially a private equity fund that is also the biggest of its kind in Africa and arguably the most radical in China.
Launched in 2007, it was part of an economic cooperation project between Africa and China. To date, it has several widely publicised investments across Africa, especially in countries like Ghana, Malawi, South Africa, Nigeria and Ethiopia, but it has been sharply criticised by western organisations for supporting regimes with poor human rights records such as Sudan. However, the fund matter-of-factly claims its primary goal is simply to help Chinese companies expand their ongoing investments in Africa, and improve social and economic development in the continent. The Chinese expect the fund to eventually reach $5bn, and some of that could come from foreign investors entering into joint ventures. For the moment, it is run entirely by the China Development Bank.
The two funds that have seen the most significant activity for foreign fund managers are the $200bn China Investment Corporation (CIC) and the $88bn National Social Security Fund (NSSF).
The larger CIC has to date been a more aggressive and diverse investor. It is essentially a government-run investment company, established in 2007. The CIC’s objective is to diversify and grow China’s enormous foreign exchange reserves. The NSSF was established a few years earlier in 2000 as a way to handle the demographic problem of its ageing population. Some call it a pension fund of last resort.
Investment direction
In the coming year, it will be the CIC and the NSSF that make the biggest moves with their investments. The CAD will continue with its smaller scale operations in Africa, while SAFE will most likely maintain its enormous reserves and treasury bond holdings. There are rumours that SAFE could increase its foreign equity exposure to 10 per cent, but this cannot be confirmed. However, according to managers who have worked with the SWFs, the overall trend for CIC and NSSF will be a continued and gradual diversification.
Bob Parker, vice-chairman, asset management at Credit Suisse, has been working with the Chinese funds for years. Although he will not even say which ones, he believes that despite a high level of sophistication of the internal management of these SWFs they will keep their portfolios conservative, with a slow trickle of new assets entering their funds.
He says: “They will make moves this year, but they are going to continue to move in an intelligent and cautious way.”
While the NSSF’s investment activity began earlier than the CIC, it is the latter that has been the more dynamic and less risk-averse investor, though that is not to say CIC is a risk taker. According to its most recent report, at the end of 2008 it had 87.4 per cent in cash, 3.2 per cent in equities, 9 per cent in fixed income and 0.4 per cent in alternatives.
Like most institutions, CIC considers itself a long-term investor. While its current asset allocation is unknown, according to its website the fund invests in foreign and domestic equities and bonds, and alternatives that include hedge funds, private equity, commodities and real estate. In principle it does not appear to have strict limits on what it chooses to do with its investments.
Despite getting burned on its initial direct investment, a widely publicised and criticised stake in US private equity firm Blackstone, CIC has continued to invest in the most diverse portfolio of all the country’s SWFs. It was also especially aggressive during the financial crisis, injecting several billion into the banking sector and upped its stakes in Blackstone.
CIC is composed of three divisions. One is the investment arm of the People’s Bank of China, which has holdings in Chinese banks, while the second has been used to refinance the China Development Bank
