258) China: cautious investments

China's investment fund sticks with cautious strategy
Steven Mufson
Washington Post Staff Writer
Wednesday, February 10, 2010; A12

When Lou Jiwei was one of China's up-and-coming Finance Ministry officials, he did a two-year stint as vice governor of one of the country's poorest provinces, Guizhou. In a typical week, he attended a soccer game, visited a chemical plant contemplating a public offering and scolded local officials about a road project that was running behind schedule.

"The Chinese Communist Party is facing a lot of pressure," Lou said then. "With the reform and opening up, people know more about the outside world, and if the party doesn't produce economic results, people will rise up against it."

A dozen years later, Lou, a computer scientist-turned-economist, is running the world's fifth-largest sovereign wealth fund, the $300 billion China Investment Corp., and more than ever he is being measured by his results.

CIC, created in 2007 to diversify China's vast foreign exchange holdings, which have been invested largely in low-yielding U.S. Treasury bonds, got off to a rocky start with large, ill-timed investments in Blackstone and Morgan Stanley shortly before the financial crisis. Lou, a career government official with ministerial rank, barely hung on to his alternate status on the Communist Party's large central committee.

Since then, however, CIC has settled into a cautious, low-profile strategy of spreading its investments among a variety of established funds and companies -- including Arlington-based AES. Lou has rejected suggestions that CIC is carrying out a national strategy. "What national strategy? Our strategy is long-term risk-adjusted returns," he said at a forum on Oct. 28 in Beijing.

CIC "is under public scrutiny, and that public scrutiny is good," said Davin Mackenzie, a private equity fund manager and former China representative of the International Finance Corp., in a recent interview in Beijing. "It puts lots of pressure on CIC to produce returns, and that's different from other state-owned enterprises in China, for which financial returns are not the only objective."

When the fund was created, many analysts feared that it would devour foreign firms. Yet CIC has not sought majority stakes or active management roles, an approach confirmed in a Securities and Exchange Commission filing Friday that outlined investments in about 60 U.S.-listed companies or index funds.

CIC has "a lot of capital and is looking for good companies, global in scope, that can help them deploy capital in areas they think are great areas to invest but in which they don't have that expertise," said Paul Hanrahan, chief executive of AES, which late last year agreed to sell a 15 percent stake to CIC for $2.2 billion.
Expensive mistakes

But CIC has made some unpublicized blunders, said sources who spoke on the condition of anonymity to preserve their relationships with the company. One costly mistake: It invested heavily in a Russian firm with sub-Arctic natural gas resources only to discover that the ownership of the resources was under dispute.

The fund is an odd private-public mixture. It receives about 100 business proposals a day, yet because of its early missteps, investments of more than $1 billion generally require the notification of senior Chinese leaders outside the fund. CIC relies heavily on experienced professionals on hiatus from the private sector, yet its in-house professionals are poorly paid by financial industry standards. The general counsel makes about $60,000 a year, according to industry sources.

"CIC operates more like a government agency than a private enterprise," said one source who has done business with the fund.

The fund was established with $200 billion when China was accumulating $1 billion a day in foreign exchange reserves and seeking returns greater than the 4 percent or so it obtained from U.S. Treasury bonds.

In May 2007, four months before the fund was formally launched, it agreed to invest $3 billion in the initial public offering of Blackstone. Shortly afterward, it sank $5 billion into Morgan Stanley. The shares of both firms plummeted. Rather than reassure Chinese leaders, the investments did the opposite.

Domestic politics also set CIC's initial priorities. The Finance Ministry favored setting up a sovereign wealth fund, while the central bank did not. As part of a compromise, CIC was forced to invest $130 billion -- two-thirds of its initial capital -- into Central Huijin Investment Ltd., a government holding company formed in 2003 to bail out China's largest banks and solidify government control of them.

Though contrary to the goal of investing outside China, the stakes in troubled Chinese banks have been among CIC's best investments. Without them, CIC's returns would have looked much weaker.
Expansion ahead

Still, the fund's relative success makes it likely that it will soon receive another $200 billion, according to reports in the official Chinese news media. That would give it greater firepower and speed up the pace of its investments.

In a speech in Hong Kong last month, Lou said CIC would target emerging markets, which he said have weathered the financial crisis relatively well. "It is not a temporary strategy anymore to invest in emerging markets, but it has been an indispensable part of strategy allocation for global investors," he said.

CIC cannot invest directly in China, the emerging market's most dynamic economy. Yet it has purchased shares of foreign companies, such as AES, that hope to expand in China. CIC recently bought 20 percent of Hong Kong-based GCL-Poly, a maker of polysilicon and wafers used in solar panels sold mostly in China.

Its $1.9 billion investment in Indonesia's PT Bumi Resources and its $500 million investment in a Mongolian coal-mining firm also hinge on China's growth.

Michael Maduell, president of the Sovereign Wealth Fund Institute, said CIC has become "opportunistic," looking at "all types of sectors," including "brand-name hedge funds." This month, it announced a $956 million investment in Apax Partners, a British private equity firm.

For firms in search of capital and a low-key partner, CIC is appealing. AES's Hanrahan says, "They're a long-term investor, which is what I like."