Bye-bye, US bonds? China’s sovereign wealth fund trims overseas equities, bonds amid ‘stresses and challenges’

China’s US$1.2 trillion sovereign wealth fund cut its holding of overseas equities and bonds last year while raising the proportion of alternative assets and cash, in light of the fast-changing external environment, according to its annual report released on Friday afternoon.

Peng Chun, chairman of the China Investment Corporation (CIC), also explicitly expressed the need to develop “new modalities for outbound investments” by leveraging its geographical advantages – hinting that it may increase the portfolio’s exposure to Asia and bilateral investment funds.

Released hours before US Fed chairman Jerome Powell’s long-awaited economic symposium in Jackson Hole, Wyoming, the report may reflect China’s unease amid bilateral tensions and its wariness over potential market adjustments if the US Federal Reserve were to start tapering bond purchases.

The CIC is one of China’s “national teams” for outbound investment. It reported overseas returns of 14.07 per cent last year, lower than 17.4 per cent in 2019, according to the annual report published on its website. The fund was established in 2007 “to diversity China’s foreign exchange holdings and seek maximum returns for its shareholder within acceptable risk tolerance”.

The CIC’s annualised cumulative 10-year net return – an internal appraisal benchmark – stood at 6.82 per cent, 1.28 percentage points higher than its target.

“The company’s overseas investment business stayed strong in the face of the multifold stresses and challenges,” Peng wrote in the report’s preface. However, “it faces a rapidly changing post-pandemic international landscape”.

He did not elaborate on those “challenges”, but market analysts often point at the still-high tensions between Beijing and Washington, the pace of Fed tapering, and potential market turbulence.

Market watchers were holding their breath over Powell’s latest thoughts on high inflation and economic growth in the United States, looking for clues about how he will guide the central bank’s exit from stimulus measures it took to protect the American economy from the pandemic.

The June “dot plot” – provided by the Fed to chart the different views of when members think interest rates may rise and by how much – suggested that there could be two hikes by the US central bank by the end of 2023.

The Chinese sovereign fund already reduced the proportion of stocks in its overseas portfolio by 0.9 percentage points last year, to 38 per cent. US stocks accounted for 57 per cent of total, compared with 31 per cent for non-US developed markets and only 12 per cent for emerging markets.

Its holding of fixed-income products, more than half of which are sovereign bonds of advanced economies, dropped from 17.7 per cent in 2019 to 17 per cent last year.

The share of alternative investments, such as real estate, commodities and infrastructures, rose to 43 per cent from 42.2 per cent, the report showed. Meanwhile, its cash accounted for 2 per cent, up from 1.2 per cent a year earlier.

Only 44 per cent of CIC’s overseas investments were managed by itself directly, while the rest were allocated through externally hired fund managers.

In its midyear work conference earlier this month, the sovereign fund already mentioned that it was striving to be more forward-looking and targeted in managing risks in its overseas investments.

The CIC is not alone in expressing concerns about overseas financial uncertainties. The State Administration of Foreign Exchange, which manages the country’s US$3.24 trillion worth of forex reserves, said last month that it was seeking to improve its forex reserves investments, trying its best to ensure safety and liquidity.

The forex regulator seldom reveals the composition or returns of its overseas portfolio, though American filing data showed China held US$1.06 trillion in US Treasury bills as of the end of June.

The sovereign wealth fund explained in its annual report that its geographical advantage consists in being rooted in China and close to the rest of Asia. “Going forward, CIC will continue to hone its regional allocation and investment capabilities, building on sector-specific research and our advantages as an institution,” it said.

The company, positioning itself as a long-term financial investor, has already started pushing ahead with new bilateral fund initiatives as it strives to “find new ways to deploy capital overseas”, Peng said.

Its cooperation funds with France, Italy, Britain and Japan have already completed their first rounds of financing and closed multiple deals.

The sovereign fund also teamed up with Goldman Sachs in 2017 to set up a China-US manufacturing investment fund which has risen to US$3 billion after three rounds of fundraising and already made its first investment. But no new information about it has been made available.