The Chinese Sovereign Wealth Fund Abroad: A Snapshot at the End of 2011

The Chinese sovereign wealth fund--China Investment Corporation (CIC)--has broad presence in the markets of many states, developed and developing. I asked my research assistant, Vlad Korolov (Penn State SIA MIA 2012 expected) to sketch the contours of that investment at the end of 2011. The object is to provide a brief sketch of the contours of CIC investment.  What emerges is a picture of an enterprise that is seeking to deepen its investment presence within key markets, and to naturalize their operations through a network of local operations.  These provide a method of quick response in important markets and also serve as important sources of information that can be used for both local operations and to enhance macro planning.   The other significant development is the willingness of CIC to partner with key similar enterprises abroad.  Lastly, the focus on resources and energy comes as no surprise. The efforts to build an integrated global financial structure, operating indirectly through joint ventures and through a web of local operations is of more interest. CIC appears to be extending its governance model--sector divided investment operations handled through key subsidiaries and related entities, globally.  The evolution of the CIC's governance structure, as its operations go global, will be of great interest in the coming year. 

(From Yang Xi, CIC to Invest $1bn in Russian Fund, China.org.cn, Oct. 12, 2011 "China Investment Corporation (CIC), China's sovereign-wealth fund, agreed to invest $1 billion in a Kremlin-backed fund, the Wall Street Journal reported. The Russian Direct Investment Fund (RDIF), a new fund worth 10 billion U.S. dollars, was established in June by the Russian government. The private-equity vehicle is aimed at promoting foreign investment in Russia. The RDIF will put the $1 billion investment from CIC into a new offshoot fund called the Russia-China Investment Fund, co-run by RDIF and CIC. The new fund aims to raise an additional $1 billion to be invested in Russia and China.")

CIC in Japan

According to Jessie Van, CIC investments into the top ten Japanese companies are around 522.2 billion yen. However, the investments into the top ten Japanese companies are only around 20- 30% of the total CIC investment into Japan. There is no concrete number of investments, but for example the investment into Tokyo Electric is considerably smaller than 35.9 million yen. The top ten investments targets are companies like Canon, Mitsubishi, and Sony. Also, there was a multimillion dollar purchase from Morgan Stanley of mortgage securities portfolio tied to the mortgages on Japanese real estate.

Mr. Van highlighted that the international investment portfolio of CIC is highly diversified. Apparently, in the world market of investments there is a related index, according to which investments are made as requested by designated persons who manage investments abroad. Thus, the fact that the market price of Tokyo Electric Power securities for example have been dropping does not play a large role in the entire investment portfolio. Apparently, CIC International (HK) Co. Ltd is also investing in Japanese infrastructure on a long term basis and despite the recent setback is certain about the rebound of these investments and throughout the Japanese market and not just of Tokyo Electric Power.1

CIC in Russia

CIC and Russian Direct Investment Fund (RDIF) announced their plans to create a Russo- Chinese investment fund with a capital of 3-4 billion dollars. The fund is created to make direct investments on the territory of Russian Federation. CIC and RDIF will both invest around 1 billion dollars each. Partners plan to solicit another 1-2 billion dollars for the fund from Chinese institutional investors. According to the memorandum, VneshEconomBank (VEB) will become a strategic partner for this new fund. The agreement was signed in the presence of Ven Tzibao and Vladimir Putin by the head of RDIF Kirill Dmitriev, the chair of CIC Lo Tzivei, and the chair of VEB Vladimir Dmitriev. RDIF will primarily manage the capital of the fund and put together the investment management team. The goal of the fund is to secure high returns on its investments using capabilities and resources of RDIF, CIC, and VEB. The fund will be officially formed by 31 December 2011 after securing all the needed permits and will start operating in the first quarter of 2012.2

This new fund appears to be called RosKitInvest. This JV is already making moves. According to the Belorussian Commodity Exchange site, it was to put 960 million rubles into a forest industry enterprise in Tomsk region of Russia around former Asinovsky Forest Industry Enterprise. Now it is delayed until mid-2012 for no specific reason. The plan involves a sawing shop for 160 million rubles and a veneer producing shop for 800 million rubles. In September, Aviation Industry Corporation of China (AVIC) joined RosKitInvest and invested another 460 million into this forestry enterprise.3 The land with forest was leased for 49 years.4 Another Russo-Chinese JV Henda-Sibir, which owns shares in RosKitInvest is planning to invest 53.4 billion rubles into a similar forest processing enterprise in the same area.5

RusAl was seeking CIC investment in 2009. The Russian aluminum and steel giant had a successful IPO on Hong Kong Exchange raising 2.4 billion dollars but failed to attract an investment from CIC.6

CIC in Hong Kong 

CIC established a wholly-owned sub in Hong Kong to take advantage of the favorable investment platform for investments outside of mainland and called it CIC International. Lawrence Lau is the Chairman.7 As of November 3rd, CIC International is underway to be fully operational. It will focus its work on equity investment, bond investments on the public market, and non-public market investment and economic research.8

CIC also spent 850 million dollars for a 15% stake in Noble, which is a Hong Kong-based commodity supplier.9

CIC in England

CIC has been investing in real estate in London after the global crisis. CIC has the third largest stake in Songbird Estates, which controls Canary Wharf Group, the property firm behind the towers that dominate London’s eastern skyline. It might also invest in the Citigroup building, which is another landmark skyscraper and is currently for sale.10

CIC in France

CIC agreed to cooperate with GDF Suez Group, a French company, and invest in its Exploration & Production division. The agreement will cover gas, power and waste, and energy services business in Asia Pacific. CIC will make 3.15 billion minority investment into the E&P. The E&P division accounted for 2.6% of aggregate revenues of GDF Suez in 2010. CIC will own 30% of the E&P division. CIC will also acquire GDF Suez’s stake in the Atlantic LNG liquefaction plant located in Trinidad and Tobago for 850 million dollars. 11

CIC Canada

CIC took a 17% stake in the largest Canadian diversified mining company Teck Resources Ltd.12

 (From CIC Opens Toronto Office, People's Daily Online, Jan. 22, 2011 "China Investment Corp (CIC), the country's 300 billion U.S. dollars sovereign wealth fund, announced Friday it had opened its first foreign representative office in Toronto. Felix Chee was named chief representative officer in Toronto. The 63-year-old Chee was once CIC's chief investment officer (CIO), and before that he served as CIO of the Canadian company, Manulife Financial. The Toronto office will seek to enhance CIC's cooperation with local companies and promote its overall investment business in Canada, according to its statement.")

CIC in Mongolia

CIC provided to SouthGobi energy Resources Ltd., which is a unit of Vancouver-based Ivanhoe Mines Ltd, a 500-million convertible debenture to expand and develop coal reserves in southern Mongolia.13

CIC in Indonesia

CIC offered to invest in three Indonesia state firms: coal mining Tambang Batubara Bukit Asam, electricity utility Perusahaan Listrik Negara (PLN) and port operator Pelabuhan Indonesia II. Initial investment is likely to be around 2 billion dollars but figure could increase more than twelve-fold to 25 billion dollars.

In 2009, CIC lent 1.9 billion to Bakrie-controlled Bumi resources, which is Indonesia’s largest coal miner. CIC or other Chinese investors may participate in other Indonesian projects that need financing like: a power plant in Parit Baru, a toll road in North Sumatra, smelting plant with the Indonesia’s second largest metal company, a Natuna natural gas processing facility in Java.14

CIC in United States

CIC appears to be interested in buying a stake in Facebook. They are interested in a stake, which is “large enough to matter.”15 CIC will partner with Intel to invest in technology innovation globally and develop the next generation of technologies.16

According to its first ever 13F SEC disclosure, CIC securities portfolio is quite mundane. The securities portfolio is worth only about 9.6 billion dollars.

“1) Aside from a few large equity stakes most of the CIC’s U.S. listed equity exposure consist either of very small stakes or stakes in broad sectoral or regional funds. A significant share of its investment is thus passive. The CIC seems to have found Exchange Traded Funds (ETFs) and similar instruments to be good ways to quickly gain access to a range of sectors. Exposure through such funds accounts for about 1⁄4 of the total U.S. equity exposure as reported in this filing. Beyond, three large stakes in Teck Resources (US$3.4 billion at the end of 2009), Morgan Stanley (US$1.7 billion) and Blackrock (US$0.7 billion), the exposures to individual stocks are relatively small. The use of index funds and exchange traded products is consistent with the CIC’s desire to minimize fees particularly on passive investments, while still maintaining a diversified portfolio.

2) Rather than just diversifying from U.S. assets, the CIC is diversifying within U.S. dollar denominated assets. A year ago, the CIC had much of its international portfolio in cash-link instruments including money markets. Now much of it has been deployed in equities and entrusted to alternative asset managers.

The CIC is heavily exposed to resources, especially metals and mining, consistent with the sector’s weight within China’s foreign assets. The share of gold alone is particularly noticeable. The CIC not only has stakes in gold producers like Anglogold Ashanti but also in the SPDR gold fund. The exposure to U.S. traded energy equities is somewhat smaller. The CIC does of course have stakes in some foreign energy companies, but the bulk of China’s 2010 energy purchases were made by the China Development Bank which extended loans to several cash-strapped energy companies and countries.

Within energy, clean tech is a focus. Chinese investment in the sector domestically and internationally is on the rise, befitting a country that has become a major assembler of clean tech components. More investment and some partnerships (for example with HK based Poly energy) suggest the CIC is providing R&D capital for these key sectors. Such partnerships seem reminiscent of some of Mubadala’s deals.

4) The CIC is still very exposed to U.S. financials. Large stakes in Morgan Stanley and Blackrock account for over US$2 billion combined (end 2009 valuations), but the CIC also has stakes in several large U.S. institutions (Bank of America, Wells Fargo), U.S. community banks and insurance companies.

Other sectors of interest include health (both pharmaceutical companies and insurance) and other industrial holdings. Despite stakes in some U.S. railroads, interest in transportation related companies and media, telecom and technology is more muted.”17

CIC in Vietnam

CIC invested with POSCO Power Corporation in AES Corp. stock to build two power plants in Mong Duong, Vietnam.18 One of them will be the biggest power plant in Vietnam. CIC will own 19% stake in the project.19

CIC in Kazakhstan

CIC bought 11% of Astana, Kazakhstan- based JSC KazMunaiGas Exploration Production for about 939 million dollars.20

Chinese Investments Globally

Although not specific to CIC, the Heritage foundation tracked the Chinese investments globally. I am guessing that the pattern identified could be somewhat indicative of the pattern for CIC investments as well. Here is their breakdown of investments by country and region.21 Australia 38.4, U.S. 30.5, Europe 43.2, West Asia 51.7, East Asia 42.6, Arab World 43.7, Sub-Saharan Africa 56.4, North and South America 72.3 billion. Chinese investments in the long-term U.S. securities increased by more than 1.6 billion dollars between 2006 and 2010.22

 (From Derick Scissors, Chinese Outward Investment: More Opportunity Than Danger, Heritage Foundation Reports, July 13, 2011)

CIC Annual Report for 2010

Here is the breakdown of CIC investments according to its 2010 report. In 2010, Cash Funds comprised 4%, Equities 48%, Fixed Income Securities 27%, and Alternative Investments 21%.23 Diversified Fixed Income Securities consisted of Government Agency Bonds 9%, Government Bonds 38%, Asset-backed Securities 12%, Corporate Bonds 32%, other structured products 9%.24 The investments broken down by region were: North America 41.9%, Asia Pacific 29.8%, Europe 21.7%, Latin America 5.4%, and Africa 1.2%. Investments broken down by sector: Financials 17%, Energy 13%, Materials 12%, Information Technology 10%, Industrials 10%, Consumer Discretionary 10%, Consumer Staples 9%, Health Care 6%, Real Estate 5%, Telecommunication Services 4%, utilities 3% Others 1%.25

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NOTES

1 Chinese investment company CIC about its investments in Japan. (In Russian.) 28.03.11 )

2 RDIF and CIC will create Russo-Chinese investment fund with a capital of 3-4 billion dollars. (In Russian.) 11.10.2011 /default.asp

3 Russian-Chinese JV delays 960 million ruble forest project in Toms Region. 31.10.2011 

4 http://lesportal.biz/rossiisko-kitaiskoe-zao-roskitinvest-planiruet-zapustit-dva-tsekha- lesopererabatyvayushchego-kompleksa-v-asinovskom-raione-tomskoi-oblasti

5 http://www.chinapro.ru/rubrics/3/6028/print

6 http://www.mineweb.com/mineweb/view/mineweb/en/page36?oid=96298&sn=Detail

7 http://www.china-inv.cn/cicen/resources/news_20101107_129418.html

8 http://www.china-inv.cn/cicen/resources/news_20111103_319065.html

9 http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ai.Vp42hM0qQ

10 Streaks of Red. 30 June 2011. http://www.economist.com/node/18895430 11 http://www.china-inv.cn/cicen/resources/news_20110810_957113.html

12 http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ai.Vp42hM0qQ; Also mentioned in its 2010 Annual Report.

13 http://www.chinadaily.com.cn/business/2009-10/28/content_8859336.htm

14 http://cafe.naver.com/preapprentice.cafe?iframe_url=/ArticleRead.nhn%3Farticleid=374&

15 http://articles.economictimes.indiatimes.com/2011-07-02/news/29730571_1_sovereign-wealth-fund- china-investment-corp-facebook

16 Announcement

17 http://www.economonitor.com/analysts/2010/02/07/a-glimpse-inside-the-cics-portfolio/

18 http://www.swfinstitute.org/swf-article/china-investment-corp-invests-in-vietnamese-coal-fired-plant/ 19 http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=13387957
20 http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ai.Vp42hM0qQ

21 Derick Scissors, Chinese Outward Investment: More Opportunity Than Danger, Heritage Foundation Reports, July 13, 2011. The regional designations might be more confusing than helpful because created by geographically- challenged neo-cons. Thus, looking at the actual map might be better. For example, Russia is a part of “West Asia,” whatever that is.

22 Chinese Outward Investment: More Opportunity than Danger.

23 Annual Report 2010. . p. 26

24 Ibid at 29. 25 Id. at 31.