China’s Wealth Fund Seeks to Stabilize Equity Markets

Lou Jiwei, chairman of China Investment Corp., poses for a photo at the Great Hall of the People in Beijing on Feb. 15, 2006.

By Belinda Cao and Li Yanping

Nov. 29 (Bloomberg) — China Investment Corp., the nation’s $200 billion sovereign wealth fund, signaled it may invest in stocks rocked by subprime mortgage defaults.

“CIC wants to be a stabilizing force in the international capital markets,” Chairman Lou Jiwei told a conference in Beijing today. He then cited a “recent example” in which a similar fund invested in a financial institution with subprime losses, without identifying the two parties.

Abu Dhabi Investment Authority this week agreed to buy a $7.5 billion stake in Citigroup Inc., helping the biggest U.S. bank by assets to bolster capital eroded by credit-market losses. China Investment, which began operations in September, was set up to help improve returns on China’s $1.46 trillion of reserves.

“The steady stream of sovereign wealth funds buying distressed assets tells us there is a buyer of last resort out there,” said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., the fourth-largest Australian bank. He said that will encourage investors to buy higher-yielding assets.

The dollar climbed to $1.4821 per euro as of 3:52 p.m. in Tokyo from $1.4841 late in New York yesterday. The MSCI Asia Pacific Index of stocks climbed 2.6 percent.

State-run investment funds will grow to $7.9 trillion in combined size from $1.9 trillion now as currency reserves climb in countries including China and Russia, Merrill Lynch economists wrote in a report last month. Abu Dhabi’s investment followed purchases by U.A.E. fund Dubai International Capital LLC in companies including London-based HSBC Holdings Plc, Europe’s biggest bank by market value.

Not a Charity

Lou, who didn’t say which investment he was referring to as his example, said wealth funds usually have a long term approach.

“This investment is not a charitable activity,” said Lou, “From a long term point of view, this is a stabilizing force for the financial market. We will do the same, that is, to become a stabilizing force in the global capital market.”

The MSCI World Finance Index has lost 11 percent this year, the worst performance among 10 industry groups on the MSCI World Index. Shares of HSBC trade at 1.7 times the book value of its assets, which is about half the 3.1 times average of the Hang Seng Index’s 11 finance-related stocks.

Today, China’s Ping An Insurance (Group) Co. bought a 4.2 percent stake in Fortis, Belgium’s biggest financial company, for 1.81 billion euros ($2.7 billion). In October, Bear Stearns Cos., the second-biggest underwriter of U.S. mortgage bonds, sold a stake to China’s government-controlled Citic Securities Co. for $1 billion.

Overseas Branches

China Investment plans to set up overseas branches in major financial centers and has had a big response to its adverts for fund managers, he said. The company must pay annual interest of 5 percent on its funds, making investments in long-term infrastructure projects “impossible,” Lou said.

“CIC’s purpose is to achieve reasonable, longterm returns and also to improve the corporate governance of domestic banks,” said Lou. He said the fund’s focus will be on traded securities in international markets with only a small part in “alternative” investments.

The fund will buy HK$780 million of stock in China Railway Group Ltd., the world’s third-biggest construction company, in a Hong Kong initial public offering next month. In May, it arranged a $3 billion stake purchase in the New York-based Blackstone Group LP. That investment lost almost nearly $1 billion in value as shares of the U.S. private equity firm fell by almost one-third since its initial public offering.

The agency said last month it will use about $67 billion to invest in financial assets around the world and the rest of its assets to help refinance China’s lenders.

To contact the reporters on this story: Belinda Cao in Beijing at [email protected] ; Josephine Lau in Beijing at [email protected]


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