Tuesday 9 December 2008
Portfolio Holds 90% Cash and CIC Is Reluctant to Invest Overseas
Despite sharply falling global asset prices, China Investment Corporation (CIC), China’s sovereign wealth fund (SWF), seems to be running a bit scared these days as lessons from its nasty early losses, and the losses of other SWFs, from ill-timed investments in US and European financial firms have convinced it that holding cash is a preferable option.
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Portfolio Holds 90% Cash and CIC Is Reluctant to Invest Overseas
CSC staff, Shanghai
7 December 2008
Despite sharply falling global asset prices, China Investment Corporation (CIC), China’s sovereign wealth fund (SWF), seems to be running a bit scared these days as lessons from its nasty early losses, and the losses of other SWFs, from ill-timed investments in US and European financial firms have convinced it that holding cash is a preferable option.
Wang Jianxi, CIC’s vice-general manager and chief risk officer, revealed last Saturday that currently 90% of CIC’s assets were in cash. According to Wang, low asset prices are not the only reason for CIC’s to invest overseas. Due to the various limits set for CIC’s overseas investment by target countries, and the uncertainty of the global economic situation, “CIC is unlikely to make any big investment in western countries.”
Mr. Wang also said even if CIC was not the best SWF in the world, it must become one of the best. Founded, as it was, quite late, it has been cautious since the beginning. “90% of our assets were in cash at the end of October,” said Wang Jianxi. “Due to the current market situation, nearly all global SWF investments are suffering losses, so since we have only invested 10% of our funds, on average our book loss ratio is quite low.”
“Our subsidiary Central Huijin has about 100 billion yuan, and has earned quite a good profit,” he declared.
Other SWFs in the world are also leery of investing overseas. As many of them have strong government backing, there are many limits on their investment. Financial institutions in developed countries have encouraged SWFs to “save the market,” but SWFs need to operate according to the frameworks set by their governments. Due to various limits, SWFs have to be very choosy about what they buy.
Miserable book losses already incurred have also reduced SWF’s willingness to dive right in. SWFs did enjoy quite good investment returns in the recent decades, but the situation has turned recently and some are looking at heavy losses. The Norwegian SWF, with its most transparent operation, declared at the beginning of September a loss of $50 billion, or 1/8 of its total fund.
Many SWFs invested overseas at the beginning of the crisis. Some Middle East SWFs invested in Citibank, and Temasek, a Singapore SWF, invested in Merrill Lynch. But now they have seen their investments drop a bundle. Wang Jianxi said that though current prices are more reasonable (cheaper), SWFs are unwilling to lay out more cash. “Due to heavy short-term book losses, and fierce criticism against their investments, SWFs have to be more fastidious in their decision making.”
Besides, the economic situation in developed nations is still not clear and policy changes are in the wind, so policy and legal risk for investment is very high. CIC manages its USD cash through a US monetary fund. Although its safety is second only to that of US national debt, risk still exists.
“Besides their unwillingness, a passive reason not to undertake more overseas investment is that the economies of SWF countries have also been affected by the crisis, and SWFs need to first meet the demands of their own countries,” said Wang Jianxi.
Wang Jianxi said in the past SWFs had seldom invested domestically, but now the global crisis has broken the convention. He emphasized, though, that since CIC’s funds come from China’s foreign exchange reserve, it is not able to invest in domestic markets.
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