China Investment Corporation’s (CIC) reported tie-up with BlackRock, the world’s largest asset manager, shines a light on the growing role for third-party western asset managers to oversee a slice of China’s $3.3 trillion foreign exchange reserves.
The prospective development comes as the $410 billion Chinese sovereign wealth fund restructures its portfolio in favour of overseas investments, as Beijing pushes to generate much-needed yield from its domestic savings.
On Wednesday, the FT reported that CIC and BlackRock had agreed to jointly launch an investment fund to be run by Liu Erfei, the current chairman of Bank of America Merrill Lynch’s China operations. The likely billion-dollar-sized fund would invest domestically as well as in overseas markets, possibly within the technologies or resources sector, the FT said, citing Hu Bing, a senior official at CIC.
The reported move to establish the joint venture is an indication of “political confidence” in CIC’s track record in generating returns and the growing role for foreign fund managers, given the under-development of the local fund management industry, says Winnie Deng, a sovereign wealth fund specialist at Shanghai-based fund consultancy Z-Ben Advisors.
By contrast, ChinaAMC, a large domestic asset manager, has “a short track record” and limited international experience with a three-year Hong Kong presence, says Ivan Shi, senior associate at Z-Ben Advisors.
Beijing’s likely move to establish a formal funding mechanism for CIC will provide the fund with the organizational maturity and portfolio sophistication that will allow it to bestow further mandates to third-party asset managers, Deng says.
Since CIC’s inception in 2007, the fund’s design and structure has been subject to continual evaluation by the Chinese authorities. As a result, it’s not clear to what extent the agency has operated with significant input, relative to the size of its assets, from third-party asset managers, Deng says.
In August, the Chinese government said it would restructure CIC by slicing off its domestic investment arm Central Huijin Investment, which holds stakes in Chinese state-owned banks, including ICBC.
The reported push to invest in part in the domestic market represents the government’s desire to “use the experience and risk-management skills of foreign portfolio managers, such as BlackRock, to support the domestic private equity market”, says Deng.
The successful partnership between Israeli private equity firm Infinity Group and the city of Chongqing in recent years created “a precedent” that highlighted the expertise and track record of foreign alternative asset managers, she says.
A $714 million stake by CIC in BlackRock was disclosed in February 2010.
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| Larry Fink, CEO of BlackRock |
Negative carry
The global financial crisis, and the subsequent need for capital, has reduced the hostility towards sovereign wealth funds and galvanized Chinese investment in developed markets. In February, CIC purchased a 8.68% stake in the UK’s Thames Water, underscoring its long-term horizon and growing taste for infrastructure investment.
CIC had $410 billion of assets at the end of 2010, and generated an 11.7% return in July on its overseas investments that year. Thanks to profits from alternative investments, which comprise 21% of its portfolio, CIC is likely to receive further direct injections from Beijing in the coming years, Deng says.
China is seeking to diversify its foreign exchange reserves away from low-yielding US Treasuries into high-yielding assets in domestic and overseas markets. Beijing is battling to dodge the so-called negative carry bullet, which is the difference between the cost of its intervention in the foreign exchange market – designed to stem renminbi appreciation – and the profit generated from its forex holdings.
A spokesperson for BlackRock declined to comment.