China's CIC May Post Record Year for 2009 as Markets, Commodities Rally

China’s sovereign wealth fund is set to post its best yearly gain in 2009 after stepping up investments in commodities to ride a rebound in global markets.

China Investment Corp. is likely to report a return on its global portfolio “well over 10 percent” in its upcoming annual statement, said Rachel Ziemba, London-based senior analyst at Roubini Global Economics. The $300 billion fund had a 2.1 percent loss on its global assets in 2008, after chalking up a 0.2 percent return in its starting year of 2007 when the value of a $3 billion investment in Blackstone Group LP plunged.

Chairman Lou Jiwei pumped nearly $10 billion into commodity-related companies such as Canada’s Teck Resources Ltd. in the second half to benefit from the global economic recovery. That compared with $4.8 billion in new investments across all industries for the entire 2008.

“2009 results should be good because commodities staged a strong rally,” said Francis Lun, general manager at Fulbright Securities Ltd. in Hong Kong. “CIC was very timid, which actually helped it to avoid the financial tsunami” in 2008.

Temasek Holdings Pte, Singapore’s state investment firm, this month said assets climbed 43 percent to S$186 billion ($135 billion) in the year to March 31. Globally, sovereign fund assets climbed 9 percent in 2009 from a year earlier to $3.5 trillion, London-based research firm Preqin Ltd. said in March.

CIC reported its 2008 results on Aug. 7, 2009.

Teck Resources, AES

CIC is asking the government for more funds to invest, Executive Vice President Jesse Wang told a conference in San Francisco on June 9, with cash holdings having dropped to 8.7 percent of its global portfolio from 87.4 percent at the start of 2009.

In July last year, CIC bought 17.2 percent of Teck Resources, Canada’s largest base-metals producer, for $1.5 billion. It acquired an 11 percent stake in a unit of Kazakhstan’s 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., China’s 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 rose 30 percent from the fund’s HK$1.79 purchase price on Nov. 19 to the end of last year.

The Reuters/Jefferies CRB Index of 19 raw materials advanced 23 percent in 2009, reversing a 36 percent drop the previous year.

Morgan Stanley, which is about 10 percent owned by CIC, surged 85 percent last year, while Blackstone doubled, helping China’s state fund recoup some earlier losses.

A record $1.4 trillion credit expansion by Chinese banks boosted state lenders’ profits last year, contributing in turn to CIC’s total earnings via unit Central Huijin Investment Co.

Bank Stakes

The Industrial & Commercial Bank of China Ltd., the world’s most profitable lender that was 35.4 percent owned by Huijin, had a 20.2 percent return on equity last year. Bank of China Ltd., 67.5 percent held by the CIC investment arm, had 81 billion yuan in profit.

“2010 will be a tougher year for CIC given that many risky assets have suffered,” Ziemba said. “CIC’s pace of purchases seems to have slowed down in the first half of 2010, as it has spent a greater portion of its liquid funds, having deployed much of the international portfolio in 2009.”

CIC had 24.68 percent of its global portfolio in public equity markets, Wang said at the Asia Banking and Finance Conference last month. The sovereign wealth fund holds about 18 percent of its investments in fixed-income securities and 8.8 percent in inflation-linked products, he said. Almost 7 percent is held in private-equity funds.

Rally Stalls

The MSCI World Index, which surged 27 percent in 2009, has dropped 5 percent this year as the European debt crisis and China’s efforts to curb asset bubbles threatened the global recovery. PT Bumi Resources, Indonesia’s biggest coal producer in which CIC made its largest investment announced in 2009, has fallen nearly 30 percent.

Excluding investments held in the Huijin unit, CIC isn’t allowed to invest in China. The government may move control of Huijin to a new agency it plans to set up to hold stakes in the nation’s state-owned financial companies, the official China Daily reported July 7.

That may result in more volatility for CIC as it would make the international portfolio the only assets it manages, Ziemba said.

Still, “it will reduce concerns from international regulators that CIC is investing on behalf and in conjunction with its bank subsidiaries,” she said. “That might reduce concerns about stakes it takes abroad.”

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

To contact the Bloomberg News staff for this story: Zhang Dingmin in Beijing at Dzhang14@bloomberg.net

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