China’s sovereign fund may bet more on resources

By Wei Gu
December 22, 2009

wei-gu.jpgChina’s sovereign wealth fund is to have its coffers restocked possibly with as much as $200 billion. This could end up being a further boost for the global commodities sector.

China Investment Corporation had $297 billion of assets at the end of 2008. Now its cash reserves need replenishing after a spending spree this year, according to people close to the fund. CIC invested as much overseas each month in 2009 as it did in all of 2008. Investments included a further $1.2 billion in Wall Street bank Morgan Stanley , and a spate of resources deals in Canada, Indonesia, and Mongolia.

The recent investment boom in resources has served CIC well, with global commodity prices jumping 39 percent this year. CIC’s $1.5 billion investment in Canada’s Teck Resources has appreciated more than 120 percent since July.

CIC’s early investment success probably makes China more eager to diversify away from U.S. Treasuries in the search for better returns. Still, about 10 percent of the new funds are set to be earmarked for recapitalisations of China’s domestic banks, in which CIC has stakes. Chinese banks are under pressure to raise as much as 400 billion yuan ($58.6 billion) of fresh capital, said one banking regulator. That means CIC could have to pay $20 billion to prevent its holdings from being diluted.

As for the rest, the focus is likely to be strategic sectors. One possible target is new energy, such as solar and wind technologies. But China’s appetite for investments in oil, metals and mining seems far from being sated judging by recent activity.

The move may also take some hot air out of the domestic economy. The funding for CIC does not come directly from the foreign reserves, but from domestic debt issuance, thus more money for CIC means less liquidity sloshing around in the domestic system. But elsewhere, CIC’s second wind looks likely to be a positive force for the resources sector.

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I totally agree with the view that China will be eyeing more on commodities. But if CIC is going to invest funds gathered by issuing debt to the public then wouldn’t it decrease the spending power of the people in China, which in turn will slow down demand and eventually the ex-China assets will loose premium which acrued mainly because of demand coming from China?

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