CIC Says Harder to Dump Holdings as Markets Integrate

Gao Xiqing, president of China Investment Corp., the country’s sovereign wealth fund, said global markets are more integrated, making it harder to dump sovereign debt investments.

The issue of a country’s financial security has also become “more complex,” Gao said at a forum in Hong Kong today. CIC needs to respect the target countries’ regulations, he said, adding that he observed subtle changes in the attitude toward Chinese investments from western governments when they needed help and when things improved.

“When we talk about international investments, we must consider whether they serve our interests,” Gao said. “We can’t say that we’re a generous nation and we can help you at whatever economic costs to us.”

China holds $1.14 trillion of U.S. Treasuries, making it the biggest foreign investor in the country’s sovereign debt. CIC, which managed $409.6 billion at the end of 2010, said in its annual report its international investments returned 12 percent last year, compared with the MSCI World (MXWO) Index’s 9.6 percent gain.

China’s gross domestic product expanded 9.1 percent in the third quarter, making it the world’s fastest-growing major economy.

Foreign governments have little choice than to buy Treasuries because they hold so many dollars. The U.S. dollar accounts for 60.2 percent for world currency reserves, according to the International Monetary Fund in Washington. China had $3.2 trillion yuan of foreign reserves at the end of September, according to its central bank.

‘No Choice’

“China has no choice but to own euro, dollar and yen assets in a good balance,” said Ayako Sera, a market strategist in Tokyo at Sumitomo Trust & Banking Co., which manages the equivalent of $322 billion. “They’ve accumulated giant pools of foreign reserves and need large markets that can accommodate those assets.”

China also cannot just sell off sovereign debt of major economies without suffering losses, Gao said.

“If we dump these, we will see rapid devaluation of the assets in our hands,” he said.

Premier Wen Jiabao said in June that China can offer “a helping hand” to Europe by buying a limited amount of sovereign bonds. Spain also secured a Chinese pledge to invest in the nation’s savings banks and in government debt earlier this year.

‘Underlying Support’

China cannot be expected to buy “the highly risky bonds” of euro-zone members “without a clear picture of debt workout programs,” Jin Liqun, chairman of CIC’s supervisory board, said on Sept. 29. He went on to say Europe’s debt crisis was caused by irresponsible spending.

“Sovereign wealth funds provide underlying support,” said Shinji Kunibe, the chief portfolio manager for fixed-income investment at Nissay Asset Management Corp., which manages the equivalent of $71 billion. “But the market has been quite volatile lately due to other factors including Europe’s developments.”

Volatility in financial markets has increased since July on speculation Europe’s debt crisis will spread to larger countries such as Italy. The Mediterranean nation, the world’s eighth- biggest economy, saw the yield on its 10-year bond jump above 7 percent last week as leaders rush to approve debt-reduction measures. Greece, Portugal and Ireland each sought bailouts after their bond yields traded above 7 percent.

“China has only two options: decrease foreign reserves or invest them in developed nations’ currencies, even if doing so incurs a loss,” said Sumitomo Trust’s Sera. “It’s a dilemma for China. Even if they think the Swiss franc is shiny, the market is too small for China’s foreign reserves.”

CIC, based in Beijing, was ranked as the world’s fifth- largest country fund, according to Sovereign Wealth Fund Institute.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net.

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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