Beijing investment vehicle may buy into blue-chip companies

PUBLISHED : Tuesday, 28 August, 2007, 12:00am
UPDATED : Tuesday, 28 August, 2007, 12:00am

China Investment Corp may use some of its US$200 billion in funds to buy stakes in domestic blue-chip companies, a sign Beijing is struggling to find profitable investments abroad as world markets tumble and the yuan continues to appreciate.

CIC, the new state foreign-currency asset management firm, would target potential equity stakes in 16 large state-owned companies with overseas ambitions, sources told the China Business News.

According to the report, the 16 Fortune 500 firms are likely to include oil giants Sinopec Corp and China National Petroleum Corp, the Big Four state-owned banks, China Mobile and China Life Insurance.

When officially launched next month, CIC will hold key stakes in China Construction Bank Corp, Bank of China and Industrial and Commercial Bank of China, having subsumed state asset management firm Central Huijin.

The plan to look for local acquisitions is part of a wider debate on investments by CIC, set up to improve returns on the mainland's US$1.33 trillion of foreign exchange holdings.

'It is not surprising that CIC is considering investing in domestic enterprises because the range of profitable investments it can make offshore is rapidly diminishing, especially as the yuan [gains],' said Glen Maguire, the chief Asia-Pacific economist at Societe Generale.

Dissenting voices argued that targeting domestic enterprises would defeat the purpose of establishing an agency designed to channel some of the foreign exchange reserves directly overseas to defuse the upward pressure on the yuan and domestic assets, the report said.

Other sovereign funds, such as Singapore's Temasek Holdings and the Abu Dhabi Investment Authority, typically buy into foreign assets.

Foreign investments would effectively have to beat the yuan's annual appreciation of about 5 per cent just to make a profit, Mr Maguire said.

But investing in domestic enterprises might push oversubscribed shares in domestic blue chips to unhealthy levels while adding liquidity to the mainland economy.

CIC had its fingers burned after the market value of its initial US$3 billion investment in Blackstone Group, a US private equity firm, lost several million dollars in just a few weeks.

With international stocks continuing to face uncertainty after the fallout in the subprime mortgage market, CIC might be forced to invest in low-yielding US treasuries and other government bonds in the short term, analysts said.

Another issue Beijing had to resolve was whether CIC should invest its funds through specialist foreign private equity houses or domestic financial institutions, the report said.

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Foreign reserve funds at the disposal of China Investment Corp, in US$200b