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CIC head warns of asset price bubble
By Jamil Anderlini in Beijing and Sundeep Tucker in Hong Kong
Published: October 28 2009 08:57 | Last updated: October 28 2009 08:57
China’s sovereign wealth fund has invested about half its $110bn in available capital in overseas stocks, mining, energy and real estate and has earned decent returns so far, the head of the fund said on Wednesday.

But Lou Jiwei, chairman of China Investment Corp, warned that a “small bubble” has already formed in global asset prices and CIC was focused on investments in commodities-related assets and real estate as a hedge against inflation and currency depreciation.

“Our returns at the moment are not bad,” Mr Lou told a conference in Beijing. “But I dare not say they will be good by the end of the year.”

CIC has made a rapid succession of investments in commodity-related companies in recent months, a move Mr Lou said was part of the fund’s strategy to hedge against long-term inflation and the “likelihood that the value of major currencies will fall to a new equilibrium point”.

He did not name a specific currency but Chinese officials have repeatedly expressed concern over the stability of the US dollar and the potential for US policies to precipitate a slide in its exchange rate.

Mr Lou’s comments came as it emerged that CIC would invest up to $700m in Iron Mining International, a privately-owned Hong Kong-registered company whose chief asset is a coveted mine in Mongolia.

According to people familiar with the matter, the Chinese sovereign wealth fund has agreed to subscribe to a $500m convertible loan and could increase its investment by a further $200m.

Iron Mining was founded by a mainland Chinese entrepreneur and his Mongolian partner. It is planning an initial public offering in Hong Kong next year which could value the group at about $5bn and create an exit opportunity for holders of its debt.

Credit Suisse, which invested in Iron Mining in May 2007, advised the company on the CIC deal. Singapore’s Temasek and Hopu Investment Management, a Beijing-based private equity fund, also invested a combined $300m in the group two years ago.

The deal came just a day after CIC announced plans to invest $500m to fund the expansion of a Canadian coal mining company in Mongolia. Last month, CIC bought an 11 per cent stake in London-listed JSC KazMunaiGas Exploration Production. CIC also recently bought $1.9bn of debt from Bumi Resources, Indonesia’s biggest coal producer, and paid $850m for a 15 per cent stake in commodities shipping company Noble Group.
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he repeatedly dismissed concerns that CIC was making investments as part of Beijing’s strategic agenda to acquire control of global resource assets.

Mr Lou said on Wednesday that commodity investments were the fund’s main focus because it wanted to take advantage of the China growth story and he repeatedly dismissed concerns that CIC was making investments as part of Beijing’s strategic agenda to acquire control of global resource assets.

“The outside world is very suspicious of us, saying we have a national agenda, but our strategy is just one of long-term risk-adjusted returns, it is to make money,” Mr Lou said. “I don’t care how many tonnes of oil we ship home, I care about the level of the stock price.”

CIC was established in September 2007 to earn better returns on a portion of the country’s $2,273bn in foreign exchange reserves.

As the financial crisis worsened, its two earliest investments – in US private equity group Blackstone and investment bank Morgan Stanley – plummeted and the fund switched its strategy to hold most of its funds in cash.

CIC decided that global markets had stabilised by the second quarter of this year and has now invested about half the $110bn it had available for offshore investment, Mr Lou said.

That means the fund has invested this year nearly nine times the $4.8bn it spent abroad in 2008, when the return on its global portfolio was negative 2.1 per cent.

In spite of CIC’s explicit focus on commodity investments, the bulk of the fund’s offshore investments are allocated to external managers and invested in public securities markets, Mr Lou said.

“We don’t have enough experience in managing a portfolio of financial products but we area able to entrust our assets to external managers with good investment performance,” Mr Lou said. “Of course, as we gain more experience we will gradually increase the proportion that we invest ourselves.”