Investing Daily

China Investment Corp (CIC) filed a 13-F Holding Report with the Securities and Exchange Commission (SEC) on Feb. 5, 2010, another action that reinforces the sovereign wealth fund’s (SWF) commitment to transparency and responsible citizenship in the global financial community. The SEC requires a 13-F HR to be filed by institutional investment managers with more than USD100 million worth of assets. For the year ended Dec. 31, 2009, CIC reported 84 positions in US-listed companies with a total market value of USD9.6 billion.

This filing is a positive from a public relations perspective and makes for good geopolitical optics. The real significance is what it suggests China can do with its USD2.7 trillion of foreign currency reserves. CIC manages only a small portion of these reserves. Rumored to soon be receiving another USD200 billion to invest, CIC’s growth has significant implications for many asset classes in many regions.

Despite CIC’s very public activities--in addition to International Monetary Fund-sponsored negotiations of a code of conduct for state-sponsored investment managers--the Chinese SWF and its peers will still be dogged by questions about ownership and intent. Equity ownership of publicly traded companies, among other asset classes, by what are essentially extensions of the state--the management and board of the CIC, for example, ultimately reports to the State Council of the People's Republic of China--has become anathema in the West over the last four decades.

The primary fear is that these entities will act at the behest of political leaders rather than investment professionals and in pursuit of aims not related to financial or economic gain. The record reveals, however, that SWFs, in the more than 50 years since the first one was founded (the Kuwait Investment Authority in 1953), have acted as responsible global investors. Much scrutiny has been drawn to them because of their proliferation during the last decade, when petroleum exporters and manufacturing exporters alike benefitted from credit-driven consumption in the West, particularly the US.

What’s different now is that rather than the subject of whispered chats among the global financial elite SWFs are the focus of weekly magazine cover stories and segments on nightly news broadcasts. They’ve gone popular, and that means politicians--as was the case with state-owned entity Dubai Ports World and its attempt to buy Peninsular & Oriental Steam Navigation Company--have plenty of opportunities to exploit these foreign investors for short-term gains.

CIC, however, has never tried to lay low, in the manner of the Abu Dhabi Investment Authority (ADIA), purported to be the largest SWF in the world with assets under management of USD875 billion. CIC’s initial allocations, made even before it had a name or was even formally constituted under Chinese law, were high-profile investments in Morgan Stanley (NYSE: MS) and the initial public offering (IPO) of The Blackstone Group (NYSE: BX).

CIC was actually trying to get recognized as a responsible source of liquidity and stability when it made these moves. Chairman and CEO Lou Jiwei has stated from CIC’s founding in 2007 that the SWF wasn’t interested in gaining control of the companies in which it invested. The focus from the beginning has merely been to generate long-term returns.

These investments in US financials didn’t work out as envisioned--the corrosiveness of subprime mortgages, credit default swaps and synthetic securities had yet to be fully realized in late 2007--and CIC has taken plenty of criticism at home for them. Whether because of these early hiccups or for some sense that trouble was on the horizon CIC kept its powder relatively dry during 2008.

But once the worst of the global financial/economic crisis had passed, however, the now USD300 billion-plus SWF stepped up as the most aggressive institutional actor on the global financial stage. Its recent public filing, its first, reveals a great deal about its investment strategy, though it only includes most of CIC’s US holdings.

According to some estimates, the USD9.6 billion reported on the 13-F represents just 10 percent of CIC’s total international portfolio. It also omits the Blackstone investment and the 2007 Morgan Stanley deal, though it does include a 2009 equity purchase. CIC’s stake in American Electric Power’s (NYSE: AEP) wind energy unit is not included because the deal hasn’t yet cleared all regulatory hurdles. CIC also undoubtedly owns real estate, positions in private equity ventures and fixed-income investments that wouldn’t appear in this disclosure.

As well, equity investments focused on foreign markets such as Kazakhstan, Mongolia and Indonesia aren’t included; such positions account for an estimated USD5 billion. But this glance at CIC’s portfolio reveals several broad trends, name exposure to resources and financials, although the balance is shifting rapidly in favor of resources. CIC got serious about deploying its capital in the second half of 2009, diversifying its exposure in terms of sectors and geography.

CIC’s largest single reported position is its enormously successful investment in Canada-based mining giant Teck Resources (TSX: TCK-B, NYSE: TCK), which accounts for 38 percent of its “listed US” portfolio. This is the highlight of CIC’s heavy emphasis on resources, particularly metals and mining. CIC also has significant gold exposure via miners and SPDR Gold Trust (NYSE: GLD).

CIC bought 17.2 percent of Teck for USD1.5 billion; as of Dec. 31, 2009, that stake was worth USD3.4 billion. Not only has the deal been financially successful. In economic terms China has established access to one of the world’s top producers of copper, metallurgical coal and zinc as well as molybdenum and specialty metals, all of which it needs in great supply to sustain the growth necessary to satisfy a potentially restive population.

The 13-F confirms, too, CIC’s status as a passive investor; most of its US equity exposure comprises small stakes or positions in sector or geographic-focused exchange-traded funds.

True to its stated aspirations, CIC has snapped up small stakes in a number of companies and distributed funds to a number of outside managers for even broader exposure. Despite this flurry, the bulk of CIC’s assets remain locked up with domestic Chinese financials. This shift from financials, domestic and foreign, toward global resource companies will likely accelerate should the rumored second USD200 billion infusion of capital take place.

For more on China, CIC and Canada--and specific ways to play the prevailing trends--see the February 2010 Canadian Edge feature article, Canada’s Eastern Edge.

Dig In

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