A Close Look at CIC's Recent Investments

By Tian Yun, Ouyang Xiaohong
Published: 2010-03-30

News, cover, Issue 461, March 22, 2010
Translated by Liu Peng
Original article:

China Investment Corporation (CIC), China's sovereign wealth fund, began to focus on investment in private equity funds and domestic heavy industry from the beginning of this year, according to a detailed list of CIC's investments made in the second half of 2009 acquired by the EO.

The list shows the CIC has made 16 investments over the past seven months from last July to February of this year, mainly focusing on overseas energy resources and real estate.

Investment Inventory

At press time, the latest CIC investment published on their website was the purchase of approximately 3,108 million shares of Hong Kong-listed GCL-Poly Energy Holdings, China's largest poly-silicon producer, at a price of 1.79 HK Dollar per share on November 19th.

Even though no new investments have been added to the official CIC website, CIC has not stopped seeking investment opportunities. According to the list obtained by the EO, CIC made another two investments in February of this year.

The latest was on February 11, when the CIC joined with 7 companies and spent 816 million US dollars in acquiring a 15.12 percent share in Zoomlion Heavy Industry Science & Technology Development Company, which is a leading enterprise in the construction machinery manufacturing industry in China.

The list also showed that on February 4th CIC invested 1.52 billion US dollars in the British private equity firm –Apax Partners- for a 2.3 percent share.

According to the list, most of CIC's investments made in the second half of 2009 were targeted at overseas energy resources and real estate sectors, with the exception of the acquisition of 40 percent of shares in CITIC Capital, an investment management and advisory firm and a subsidiary of CITIC Group, the state-owned financial conglomerate. The transaction amount was not disclosed.

CIC also spent 1.58 billion US dollars to acquire 125.5 million shares, approximately 15 percent, of the US-based well-known global electrical power company, AES Corporation (AES), on November 6th last year.

In addition to this deal, CIC also signed a letter of intent with AES to invest an additional 571 million US dollars for an approximate 35 percent interest in AES's wind generation business.

On October 15th the CIC invested 100 million US dollars in the Russian Nobel Oil Group to acquire a 45 percent share in the company.

On September 21st, it spent 856 million US dollars purchasing a 14.96 percent share of Hong Kong-based Nobel Group, a global supply chain manager of agricultural, industrial and energy products.

On July 14th, the CIC invested 939 million US dollars to acquire approximately 10.39 percent of the global depositary receipts of JSC KazMunaiGas Exploration & Production.

According to the inventory list, the CIC has spent nearly 4.05 billion US dollars investing in overseas energy concerns, which accounts for over 53 percent of the total amount of total funds invested in the second half of 2009.

In terms of the real estate sector, last August the CIC invested 421 million US dollars in Goodman Group, an Australian integrated industrial property development and management company.

Last July, it also invested in the Hong Kong-listed BBMG Corporation, one of the largest building material manufacturers and property developers in China.

Last September, the CIC also spent 158 million US dollars to acquire a 14.53 percent stake in Songbird Estate, a well-known property developer in the U.K.;the same month, CIC invested 53 million US dollars in exchange for 2.3 percent of Poly (Hong Kong) Investments, a subsidiary of China Poly Group Corporation, a centrally-owned enterprise allowed to major in property development.

Investment Preference

Among these numerous investments, the CIC also focused on exchange traded funds (ETFs). According to files disclosed to the US Securities and Exchange Commission, the CIC spent approximately 2.4 billion US dollars to purchase the ETFs, which accounted for 25 percent of CIC's US investments.

The CIC seems to prefer to invest in iShares, Sector SPDR, Pow-erShares and Market Vectors Gold Miners funds. The largest investment made in ETFs was the investment of 254 million US dollars in the iShares S&P Global Materials Sector Index Fund.

Don Dion, president of Dion Money Management a fee-based investment advisory, attributed CIC's fondness for ETFs to China's strategy of holding the shares of many companies in related industries to hedge risk exposure: "I think that the CIC's fondness for ETFs can tell us some thing: CIC and the Chinese government are very clear about their importance to the global market. The Chinese government will actively avoid rash actions thereby influencing the price of ETFs closely related to China," he said.

Besides the ETFs, the CIC also took an interest in private equity.

According to a report from the Financial Times, the CIC has hired Goldman Sachs, Lexington Partners, and Pantheon Ventures, to find good opportunities in private equity secondary markets. Each of the three firms will be given 500 million US dollars to manage.

The move was in line with the investment trends of global sovereign wealth funds (SWFs). According to a report released by Preqin, a private equity intelligence firm, 55 percent of SWFs made investments in private equity while 51 percent forayed into the real estate sector.

Due to its prudent attitude, the CIC focused on cash and cash asset alternatives in 2008, but now it seems to be eager to use its cash reserves to invest. Compared with other SWFs, CIC pursued a lot of overseas investments in the second half of 2009.

The CIC's Burden

Given its registered capital was raised by the issuance of special treasury bonds at a fixed interest rate of 4.5 percent per annum, the CIC now faces huge pressure to pay back the regular dividend, said Zhang Ming, a researcher at the Chinese Academy of Social Sciences.

Miao Yingchun, a post doctorate at the Institute of Financial Sciences of the Ministry of Finance, noted in an article that, considering the bonds' high annual interest rate and an 8 percent appreciation rate of the Renminbi per year, CIC had to keep its rate of annual return at above 13 percent; otherwise, the MoF would face financial losses.

Miao also pointed out, compared with the SWFs of other rich countries, the CIC will assume more responsibility in seeking a path to support China's economic development.

However, CIC has had to look to international investment banks for advice in terms of detailed investment.

A source close to the CIC revealed to the EO that many of the recent investments the CIC made overseas were recommended by international investment banks.

"A large part of the CIC's work is to contact these international banks in order to acquire information about investment opportunities," the above source said.

According to the list, Morgan Stanley, Goldman Sachs and JP Morgan served as financial consultants in the 14 investments made by the CIC in 2009.

Links and Sources
Official Site

The Economic Observer: China's Sovereign Wealth Fund Favors Real Economy
The Economic Observer: CIC No Longer to Pay Interest to the State
The Economic Observer: China's Sovereign Wealth Fund After Another 200 Billion US Dollars