Bloomberg News

CIC Stops Buying Europe Government Debt on Crisis Concern

May 10, 2012

Gao Xiqing, vice chairman, president and chief investment officer of China Investment Corp., takes part in a panel discussion at the International Monetary Fund (IMF) and World Bank annual fall meeting in Washington, D.C., U.S. Photographer: Joshua Roberts/Bloomberg

Gao Xiqing, vice chairman, president and chief investment officer of China Investment Corp., takes part in a panel discussion at the International Monetary Fund (IMF) and World Bank annual fall meeting in Washington, D.C., U.S. Photographer: Joshua Roberts/Bloomberg

Gao Xiqing, president of China Investment Corp., said the nation’s sovereign wealth fund has stopped buying European government debt on concerns about the region’s financial turmoil.

CIC will continue to look for new investments in Europe as part of its strategy to boost allocations to infrastructure, private-equity assets as well as emerging markets to help boost returns, Gao said. CIC, with an estimated $440 billion in assets, is the world’s fifth-largest country fund, according to Sovereign Wealth Fund Institute.

“What is happening in Europe right now is of course of concern,” Gao said in an interview in Addis Ababa, Ethiopia, during the World Economic Forum on Africa. “We still have our people looking at opportunities in Europe, even though we don’t want to buy any government bonds.”

Europe’s turmoil is reigniting on the second anniversary of policy makers’ first attempt to prevent Greece’s woes from spreading. That raises fresh doubt over the strategy just as Greece’s election spurs concern that the country may not meet the terms of its international rescues and will seek a solution outside the euro.

The 17-nation euro area is on the verge of losing one of its members, with more than 50 percent of investors predicting an exit this year as Greece’s election impasse threatens to push the crisis to new depths, according to a Bloomberg Global Poll.

“Two or three years ago we started moving gradually from Europe and North America to Asia and Latin America,” Gao said. “We aren’t doing too much” in Europe.

Bloomberg Poll

As Greece faces political paralysis and voters balk at austerity, 57 percent of the 1,253 investors, analysts and traders who are Bloomberg subscribers said at least one country will abandon the euro by year-end and 80 percent expected more pain for Europe’s bond markets. With a majority identifying a deterioration in Europe as a large threat to the world economy, respondents to the May 8 survey were increasingly worried Spain will default and less willing to buy French debt.

“We will be watching very closely because it is a big part of our investment,” Gao said. “It’s a long-term problem. Europe is still Europe. It is still one of the most massive economies in the world and has its own place in the world capital markets.”

European Infrastructure

The euro posted its longest slump since 2008 and European shares fell to the lowest in almost four months. Spain said yesterday it would take over Bankia SA (BKIA), the banking group with the most Spanish real estate, as part of efforts to bolster confidence in the country’s lenders.

“I don’t expect them being a big buyer, or any substantial buyer or seller of European government debt,” said Zhang Zhiming, head of China research for HSBC Holdings Plc in Hong Kong. “The purpose of creating CIC is to seek high-risk, higher-return investments,” which differentiates it from the State Administration of Foreign Exchange, the main manager of China’s foreign reserves that mainly invests in safer investments such as government bonds.

“If European governments want to issue bonds, CIC is not a main target institutional investor,” he said.

CIC is willing to consider infrastructure in Europe, and can take stakes in companies that need capital, Jin Liqun, the chairman of the fund’s supervisory board, told CNBC in December.

Bailout Funds

Government and government agency bonds accounted for 47 percent of CIC’s “diversified” fixed-income securities as of Dec. 31, 2010, the fund said in its 2010 annual report without disclosing figures for European government debt. “Diversified” holdings were 76 percent of its global portfolio, as compared to 24 percent of “direct concentrated” investments, according to the report, released in July.

The fund added new investments including U.S. dollar aggregate bonds and euro covered bonds in 2010, the report said without giving more details. Fixed-income investments accounted for 27 percent of its global portfolio as of end of 2010, up from 26 percent in 2009.

In February, People’s Bank of China Governor Zhou Xiaochuan said the central bank will invest in Europe’s bailout funds and sustain its holdings of euro assets.

“CIC is a vehicle to make investments overseas and doesn’t necessarily represent what China sovereign is doing,” said Wee- Khoon Chong, fixed income strategist at Societe Generale SA in Hong Kong in an interview.

Africa Investments

The fund is boosting investments outside of China as it seeks to increase returns on the nation’s foreign-currency reserves and secure commodity supplies. The Chinese government injected about $50 billion this year in the sovereign wealth fund, Gao said. The government has not made a decision on whether to regularly inject capital into the company, he said.

“Right now, we are busy enough, so we don’t worry terribly about recapitalization,” he said. “In the long run, we should do something about it.”

The Chinese sovereign wealth fund would “love” to boost investments in Africa, Gao said. The company is limited in how much it can invest in Africa because the projects are not large enough to fit its investment criteria, he said.

“It’s probably not surprising that the Chinese authorities are looking elsewhere,” said Stephen Halmarick, Sydney-based head of investment market research at Colonial First State Global Asset Management, which oversees about $150 billion. “Other investors in other parts of the world will be very cautious about European debt at this moment.”

Mining Industry

The company only considers investments of at least about $100 million in African companies and wants to take no more than a 10 percent stake in them, he said. There are not many companies outside of the mining industry in Africa that fit those criteria, making spending on the world’s poorest continent a challenge, he said.

The ventures need to have a return that is on average about 200 basis points, or 2 percentage points, more than investments in the developed world, he said.

CIC will buy 25 percent of former South African politician Cyril Ramaphosa’s Shanduka Group for 2 billion rand ($251 million), the company said on Dec. 22.

CIC was set up in 2007 with $200 billion from China’s Ministry of Finance. The fund posted an 11.7 percent return on its overseas investments in 2010, it said in its annual report, compared with the 9.6 percent gain of the MSCI World Index.

To contact the reporter on this story: Andres R. Martinez in Johannesburg at amartinez28@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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