china wealth fund weighs new commodities bets

Chinese still looking for commodity investments, i wonder if they are looking at AXO as we speak.

http://www.bloomberg.com/apps/news?pid=20601089&sid=aeyawIJ8FKoQ


China Wealth Fund Weighs New Commodities Bets After 2009 Gains
Email | Print | A A A By Bloomberg News

Jan. 27 (Bloomberg) -- Chinas $300 billion sovereign wealth fund is considering new investments in resource-related companies after bets on commodities producers from the U.S. to Kazakhstan paid off in 2009.

China Investment Corp. increased spending on energy and minerals assets last year to profit as the global economy recovers. The Beijing-based fund avoided the worst of the credit crunch in its first full year in 2008 and may have had a return of more than 10 percent in 2009, said London-based Jan Randolph, director of sovereign risk, analysis and forecasting at IHS Global Insight.

They have timed the upside well both in market terms, but also to fit in with the longer-term diversification strategy, Randolph said.

CIC has had early talks for direct investments in Brazil, the worlds second-biggest iron-ore exporter, and Mexico, the No. 2 silver producer, CIC Chairman Lou Jiwei said at the Asian Financial Forum in Hong Kong on Jan. 20. Lou pumped about $10 billion into commodity-related companies in the second half of 2009, according to data compiled by Bloomberg.

With Chinas reserves at $2.4 trillion and swelling by an average of $37.8 billion a month last year, CIC has asked the government for another $200 billion, the Economic Observer reported Nov. 21, citing a person it didnt identify.

Teck Resources

In July, CIC bought 17.2 percent of Teck Resources Ltd., Canadas largest base-metals producer, for $1.5 billion. It acquired an 11 percent stake in a unit of Kazakhstans state-run energy company in late September, two weeks before purchasing 45 percent of Nobel Oil Group of Russia. In November, it announced investments in U.S. power producer AES Corp. and GCL-Poly Energy Holdings Ltd., Chinas biggest polysilicon producer.

AES closed at $13.31 in New York trading Dec. 31, giving CIC a paper profit of 7 percent, while GCL-Poly shares had risen 30 percent from the funds HK$1.79 purchase price. CICs early investments also recovered some losses last year, with shares of Blackstone Group LP doubling and Morgan Stanleys stock surging 85 percent.

Those returns may encourage CIC to be more aggressive, according to Zhang Zhiming, director of asset allocation research at HSBC Holdings Plc in Hong Kong.

Most investors do momentum investing and CIC is no exception, he said. They are sticking to a double- diversification principle. First, buy a bit of everything and be geographically spread out. And timing-wise, to be also spread out to avoid major ups and downs.

All Categories

CIC likely will expand the scope of its investments this year into all categories, including U.S. and European markets that it largely shunned in 2009 during the crisis, Zhang said. The fund may invest in a U.S. infrastructure project, Lou said Jan. 20 at the conference in Hong Kong, without giving details. It may put money in U.S. high-speed railways, the Shanghai Securities News reported Jan. 13, citing a person it didnt identify.

CIC was created in September 2007, funded by a $200 billion chunk of the nations foreign reserves. The $2.4 trillion in reserves -- equivalent to the annual output of India and Australia combined -- have increased about 60 percent since CIC was founded, driven by current account surpluses and foreign direct investments.

A CIC press official, who declined to be identified, said she was unaware of the request for $200 billion in extra funds reported by the Economic Observer. The companys top executives werent available for interviews for this story.

CIC will soon become one of the top three sovereign wealth funds in the world with this extra capital, and one of the most aggressive in 2010 to 2015, said IHSs Randolph.

Unwanted Barriers

China, which cut Treasury holdings by the most in five months in November, may scale back purchases of U.S. debt on concern the dollar will decline, Liu Yuhui, an economist at the Chinese Academy of Social Sciences, said on Jan. 20.

Increasing investments in resources may invite unwanted political barriers for a sovereign wealth fund like CIC, said Jing Xuecheng, a former CIC representative on the board of China Construction Bank Corp. Whether thats going to draw strong resistance deserves some attention, he said in an interview.

Potential political hurdles in the U.S. and Europe may see CIC target emerging markets, especially assets in cash-strapped Africa, said Shi Yan, an energy analyst at UOB-Kay Hian in Shanghai. In terms of asset classes, CIC may be looking more at resources like natural gas and uranium, which China needs to fuel its energy needs, from central Asia, Shi said.

Lou has rejected perceptions that CIC is carrying out Chinas national strategy of securing resources. What national strategy? Our strategy is long-term risk-adjusted returns, he said at a forum on Oct. 28 in Beijing.

Morgan Stanley, Blackstone

The biggest deal CIC announced last year -- the $2.2 billion investment in Arlington, Virginia-based AES and its wind-generation business -- compared with its initial $5.6 billion investment in Morgan Stanley on Dec. 19, 2007, and $3 billion in Blackstone, manager of the worlds biggest buyout fund, earlier that year.

To sustain Chinas growth momentum, it needs to import raw/industrial commodities to feed its hungry industries at home, said Song Seng-Wun, an economist at CIMB-GK Securities Pte in Singapore. Over the coming years, China will continue to suck in these resources at a strong pace.

Chinas gross domestic product rose 10.7 percent in the fourth quarter from a year earlier, according to government data on Jan. 21, the fastest pace since 2007.

Indirect Investments

CIC invests the $110 billion it has for overseas mainly in financial products, with only small amounts on direct investments, Lou has said. Aside from announced deals, a bigger part of investments were made through external managers and didnt need to be disclosed, he said.

Last year, CIC disclosed no new investment in financial companies except for an additional $1.2 billion in Morgan Stanley to reduce the average costs and enlarge the room for profit, it said in June. CIC posted a 2.1 percent loss in 2008.

The company probably outperformed the average of sovereign wealth funds like Government of Singapore Investment Corp. and the Abu Dhabi Investment Authority last year, as it held onto earlier financial investments and boosted resource-related stocks, HSBCs Zhang said.

CIC made a 2.1 percent loss from its overseas holdings in 2008. Still, its return on equity amounted to 6.8 percent as the value of its stakes in Chinas biggest banks rose. By contrast, the value of assets at GIC, manager of more than $100 billion of Singapores foreign reserves, fell more than 20 percent in the year to March 31, 2009, as the collapse in financial markets drove down the value of its stake in UBS AG.

CICs initial late 2007 investment mistakes with Blackstone and Morgan Stanley served them very well because CIC kept most of their portfolio in cash throughout 2008, said IHSs Randolph. This also meant that in 2009 they had the cash firepower to selectively buy into rising asset markets of their strategic choice when others were still rebuilding.

--Zhang Dingmin. Editors: Malcolm Scott, Andreea Papuc.

To contact the Bloomberg News staff for this story: Zhang Dingmin in Beijing at [email protected].

Last Updated: January 26, 2010 11:01 EST