China’s New Sovereign Fund Chief Under Pressure to Boost Returns

Ding Xuedong takes over as head of China’s wealth fund facing three challenges: boosting returns, finding new capital and dealing with rivalry from the manager of the nation’s foreign-exchange reserves.

His appointment, announced July 5, ends months of speculation over who would take charge at China Investment Corp. after Lou Jiwei was named Finance Minister in new Premier Li Keqiang’s government in March. Ding, 53, a former deputy finance minister, will move from the State Council where he was a deputy secretary-general.

Ding’s need to improve the fund’s returns takes on added urgency as the U.S. Federal Reserve prepares to slow record monetary stimulus, raising prospects for higher interest rates. He will also face increasing scrutiny over his performance as the State Administration of Foreign Exchange diversifies its portfolio into higher-yielding assets from its traditional focus on safer U.S. Treasuries.

“All in all, it won’t be an easy job for Ding Xuedong and that’s the reason why it took some time to find a replacement” for Lou, said Victoria Barbary, director at the London-based Institutional Investor’s Sovereign Wealth Center. “CIC is now almost fully invested and it’s not sure that they are going to get any more funds. SAFE is becoming more aggressive in its investments. It’s becoming more and more of a competitor to CIC and for that reason they won’t want CIC to get more funds.”

Ding will become the $482 billion sovereign wealth fund’s second chairman since it was founded in 2007 to earn better returns on the country’s foreign-exchange reserves. The holdings, which stood at $1.53 trillion at the end of that year, have since surged to $3.44 trillion.

Financial Crisis

The fund got off to a bad start under Lou, posting a negative 2.1 percent return on its overseas investments in 2008 amid the global financial crisis as the value of its stakes in Morgan Stanley and private-equity firm Blackstone Group LP slumped.

CIC hasn’t publicly announced its performance for 2012 yet although the official Xinhua News Agency issued a report last month citing President Gao Xiqing as saying the fund achieved an investment return of about 11 percent on its overseas portfolio last year. That compares with a loss of 4.3 percent in 2011 as declines in global commodity prices roiled the value of its resource-heavy portfolio.

The fund has met the government’s expectations by delivering 5 percent annualized returns since its creation, Xinhua cited Gao as saying.

Diversified Portfolio

CIC is trying to cut an “over-reliance” on U.S. debt as an economic recovery drives up interest rates, Lou told a forum in Hong Kong in January. The fund has diversified its portfolio, increasing direct investments in oil and gas, mining, infrastructure and real estate. Its holdings include 10 percent of London’s Heathrow Airport.

“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.”

Two candidates to replace Lou -- Shanghai Vice Mayor Tu Guangshao and Yi Gang, a deputy governor of the People’s Bank of China -- declined the position because of concerns they may be blamed for investments that that fare poorly, the Financial Times reported in May, citing unidentified people.

‘Good Performance’

Ding spent more than 10 years at the Ministry of Finance and holds a doctorate in economics from the ministry’s research institute, according to Xinhua. The announcement of his appointment as State Council deputy secretary-general in 2010 didn’t outline his responsibilities.

CIC, created with an initial $200 billion from the Ministry of Finance, received a further $30 billion infusion in December 2011 after allocating almost all its initial capital. The Financial Times reported in April 2011 that the fund would soon receive $100 billion to $200 billion from the government, citing three unidentified people familiar with the matter.

“In addition to investment returns, a more important question is to determine the funding mechanism,” said Z-Ben’s Deng. “Whether it will be periodic and in what form -- debt or equity -- because that will also affect how funds are deployed and the urgency to have good performance.”

’Innovative’ Use

CIC is ranked the world’s fifth-largest state-owned investment entity, while SAFE, which is headed by Yi Gang, is third, according to the Sovereign Wealth Fund Institute in Las Vegas.

The administration, which holds most of the country’s foreign-exchange reserves and oversees their day-to-day management, has set up an office to deliver on a government mandate for more “innovative” use of the holdings.

The agency is studying the possibility of investing a portion of its reserves in U.S. property after noticing signs of a recovery, two people with direct knowledge of the situation said in May.

The two Chinese government asset managers “share a healthy rivalry,” Patrick Schena, co-head of the Sovereign Wealth Fund Initiative at Tufts University in Medford, Massachusetts, said in an e-mail. “Perhaps a more important question is: if/how this rivalry may affect investment decision-making at CIC in the future.”

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