DealZone

CIC braves U.S. distressed assets

China is no stranger to rolling the dice on risky U.S. investments. But like most big investors, it has been staying away from the tables for a while. Now we have word that its $200 billion sovereign wealth fund is pouring $2 billion into three funds focused on U.S. distressed assets. The funds are run by Goldman Sachs, Oaktree Capital and a third, as yet unidentified manager.

At only 1 percent of its portfolio, the balance of risk to Chinese wealth is small. CIC has pumped up its investment volume recently, buying a 14.5 percent stake in commodities trading firm Noble Group for $850 million just last week. Resources may seem like a better investment for a Chinese state-linked fund than distressed U.S. assets, given the country’s gaping hunger for commodities. But China’s macroeconomic exposure to the U.S. economy is at least as important to its future as its ability to source foreign raw materials. And with the dollar against the ropes, distressed U.S. assets may offer China a better bang for its buck.

CIC made a profit of $10 billion last year as it benefited from staying largely in cash and avoiding new investments in Western banks, a source close to the fund told us in February. But it lost over half of an initial $8 billion it ploughed into private equity firm Blackstone and Morgan Stanley when the fund was set up in September 2007.

CIC Chairman Lou Jiwei (pictured above) said in Hong Kong last December that he was “not brave enough” to invest in financial institutions at that time. He seems to have found his nerve.

The great Chinese commodities play

China’s dominant position in world commodity markets is as enduring as one of its emblematic Forever bicycles. As Communists, the People’s Republic spent years perfecting the art of buying in bulk, dictating prices through sheer mass of demand. Now that the country has become the world’s factory, it would make sense for China to take a more refined approach to trading raw materials. It’s worth seeing the latest moves by China’s $200 billion sovereign wealth fund in that light.

Having been rebuffed in its efforts to purchase offshore commodity assets in Australia, China’s purse managers are taking stakes in commodities brokerage businesses. Most recently, China Investment Corp bought a 14.5 percent stake in trading firm Noble Group for $850 million. The purchase comes just days after CIC signed a cooperation pact with commodity trader Glencore.

Some are looking at this as a flexing of muscle — an “attempt to increase its influence in the sector,” the BBC calls it. Our reporter Neil Chatterjee also hits on this angle, talking about Beijing trying to gain “leverage in opaque global markets and access to the raw materials needed to feed its economy.”