China Investment Corporation - Investment Strategies

Investment Strategies

China has invested two-thirds of its reserves in US dollars, mostly US treasury bonds and agency bonds. The devaluation of the US$ on world currency markets has provided poor returns, prompting the Chinese to create the CIC to manage China's investment in equities.

Credit Suisse predicted CIC would only take a 5-10 per cent stake in each company, remaining a passive investor to avoid political hassles in overseas markets. CIC bought a $3 billion stake in Blackstone, one of the largest US private equity firms. CIC has refrained from influencing Blackstone's investment strategy. The company will mainly pursue combined investments in overseas financial markets.

CIC is thought to engage in building influence for the government by buying up significant stakes in companies that have influence in western governments including airline companies as also target firms that have heavily invested in China. The investments would help the government to influence the policies of multinational companies and to protect China's interests in international spheres.

Market watchdogs want to know what would happen if China, Russia and Arab countries were to systematically acquire significant holdings in sensitive industries such as telecommunications, energy and defense.

The new fund has been placed under the authority of Chinese Premier Wen Jiabao.

Lou has been assigned the rank of a minister. During daily operations, he will answer to a host of other agencies, including the powerful National Development and Reform Commission, a successor to the former influential State Planning Commission. Lou said CIC will operate on the principle of "commercial operation", and will abide by local laws of countries where it invests.

The state media had earlier speculated that the company will invest $67bn to buy the assets of Central Huijin, the investment arm of the central bank which holds shares in most state-run banks. It was later reported that Huijin was acquired by CIC from the State Administration of Foreign Exchange for $200 billion.

China's leadership has debated the right strategy for the government investment fund. Vice Premier Zeng Peiyan has suggested that China should invest in natural resources to increase its strategic reserves. Other high-ranking party officials would rather see the country acquire shares in high-tech companies to help China more rapidly close the gap with leading industrialized nations.

Three years ago, dealers working for China Aviation Oil in Singapore, China's sole supplier of aviation fuel, suffered losses of $500 million from miscalculations and rising oil prices.

CIC bought a US $3 billion stake of Blackstone Group in June and a 9.9 per cent stake of Morgan Stanley worth US$ 5 billion on December 19, 2007.

The Chinese Internet community regularly vents its anger over government losses of the people's money, and there is widespread skepticism among Chinese party leaders and the public over the extent to which the country should get involved in global equities investments. Western investment banks Goldman Sachs and Morgan Stanley will provide expert knowledge to China's state-sponsored venture capitalists.

On March 2, 2009, Chinese media reported that the CIC was shifting its investment strategy to focus more on real estate, resources, and other areas more tied to the "real economy".