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China Names New CIC Chairman as U.S. Mulls Winding Down Stimulus

China Investment Corp.'s Chairman Ding Xuedong
Ding Xuedong, deputy secretary-general of China's State Council and chairman of China Investment Corp., is seen in this 2009 photo. Source: Imaginechina

China appointed Ding Xuedong, a deputy secretary-general of the State Council, as head of the nation’s sovereign wealth fund at a time when the prospect of the Federal Reserve reducing stimulus has roiled global markets.

Ding succeeds Lou Jiwei, who became finance minister more than three months ago, as chairman of China Investment Corp., the Beijing-based company said on its website yesterday. The appointment ends speculation since March on who would take the helm at the $482 billion fund.

Under Lou, CIC boosted holdings of resources-related companies and bolstered long-term portfolio and private-equity assets. Ding faces the prospect of rising interest rates after Fed Chairman Ben S. Bernanke said bond purchases that have buoyed assets worldwide may be halted in 2014 if the world’s largest economy performs in line with the central bank’s projections.

“It will be difficult to meet return expectations in light of recent market volatility,” Sven Behrendt, managing director at Geneva-based political risk research and advisory firm GeoEconomica, which does research on sovereign wealth funds, said before the announcement. “Those return expectations will be high, given CIC’s bumpy performance over the past years.”

North America accounted for 44 percent of CIC’s diversified equity investments as of Dec. 31, 2011, according to its latest annual report. The fund held 62 percent of its fixed-income portfolio in government bonds.

Meet Expectations

CIC, set up in 2007 to boost yields on China’s foreign-exchange reserves, achieved an 11 percent investment return on its overseas portfolio last year, compared with a loss of 4.3 percent in 2011 as declines in global commodity prices roiled the value of its resource-heavy portfolio, Xinhua News Agency reported June 7, citing President Gao Xiqing. The fund met the government’s expectations by delivering 5 percent annualized returns since its creation, Gao was cited as saying.

Ding, 53, was a deputy finance minister when he was appointed to his state council job three years ago after more than 10 years at the ministry, according to a resume published by Xinhua. He holds a doctorate in economics from the finance ministry’s research institute, according to Xinhua.

Two candidates -- Shanghai Vice Mayor Tu Guangshao and People’s Bank of China Deputy Governor Yi Gang -- declined the position because of concerns they may be blamed for investments that end up poorly, the Financial Times reported in May, citing unidentified people.

‘Great Changes’

China is ushering in a new generation of chiefs in its finance system following the once-in-a-decade leadership transition that culminated in Li Keqiang replacing Wen Jiabao March 15 as premier of the nation holding the world’s largest foreign-exchange reserves.

“Lou has made some great changes in terms of the direction and investment allocation transformation during his tenure,” Winnie Deng, a Shanghai-based analyst covering sovereign wealth funds at research firm Z-Ben Advisors, said in an e-mail before the announcement. “But it is up to the new head to actually realize returns from the shift in investment strategy.”

The fund is adding stable-return assets including infrastructure and real estate as it cuts an “over-reliance” on U.S. debt, Lou told a forum in Hong Kong in January.

It boosted private-equity positions and expanded real estate holdings to pursue stable asset returns in 2011, while continuing to make direct investments in oil and gas, mining and infrastructure, according to the annual report for that year. Equities fell 9 percent to $59.7 billion as of end of 2011, while alternative investments expanded 38 percent to $40.5 billion, it said then without elaborating.

Heathrow Airport

CIC bought 10 percent of London’s Heathrow Airport from investors, including a 5.72 percent stake from Spanish builder Ferrovial SA, the companies said in November. The fund, together with Moscow-based VTB Capital, purchased bonds the same month from billionaire Suleiman Kerimov and his partners in potash producer OAO Uralkali that can be exchanged for shares valued at about $3.2 billion.

The wealth fund holds stakes in China’s biggest banks through unit Central Huijin Investment Ltd., which contributes to the fund’s profit.

CIC is ranked the world’s fifth-largest state-owned investment entity after funds in the Middle East, Norway and China’s State Administration of Foreign Exchange, or SAFE, according to the Sovereign Wealth Fund Institute.

Foreign Reserves

The fund was created with an initial $200 billion from the Ministry of Finance to improve returns on the nation’s foreign reserves, which have more than doubled since 2007 to $3.44 trillion at the end of the first quarter, driven by current account surpluses and foreign direct investments. The fund received a further $30 billion capital infusion at the end of 2011 after in the previous year allocating almost all its initial capital raised by a $200 billion bond sale by the finance ministry.

CIC posted a 2.1 percent loss on its overseas investments in 2008 amid the financial crisis, before reporting an 11.7 percent return in each of the following two years as the global economy recovered. It booked a 10.7 percent return for last year as it sold some earlier investments to lock in profit, Executive Vice President Liang Xiang said earlier this year.

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