China's CIC defends transparency, eyes modest returns

HONG KONG (Reuters) - An executive at China Investment Corp, the country's $200 billion sovereign wealth fund, defended its steps toward transparency and said the fund only targets a modest, single-digit investment return.

The comments of Jesse Wang, CIC's executive vice president and chief risk officer, on Wednesday came as politicians call for better disclosure from sovereign funds, which have taken multi-billion dollar stakes in several Western financial firms.

Wang said the fund, whose investments in Morgan Stanley (MS.N) and private equity house Blackstone Group (BX.N) have both fallen sharply since CIC bought, compared itself to a pension fund or endowment and set modest goals for returns.

"We think we're quite conservative at this time. I think it's about mid-one-digit, or slightly above one digit," Wang told a Credit Suisse (CSGN.VX) fund manager conference in Hong Kong.

Wang outlined CIC's internal structure, aware of both heat the fund is taking from within China over its performance, and the backlash it and other sovereign funds face from the likes of Washington D.C. and other capitals concerned about investments by foreign governments.

"CIC is one of the most transparent sovereign funds in the world," he said.

But Wang was candid that the CIC is inexperienced and learning from mistakes. He said reporters often ask him if CIC will continue to invest in the United States, a region still getting battered by the credit crunch.

"It is an opportunity," he said during the speech. "But the opportunity is for people who are ready."

China set up the sovereign fund last September to earn greater returns on its $1.53 trillion of foreign exchange reserves, most of which is in safe but low-yielding U.S. bonds.

Sovereign wealth funds, many of them based in Asia and the Middle East, manage more than $2 trillion, but that could grow to $15 trillion in eight years, the U.S. Treasury estimates.

POLITICAL BACKLASH

Since the credit crunch hit last summer, sovereign funds from Abu Dhabi to Singapore have taken stakes in Western banks such as Citigroup (C.N), Merrill Lynch MER.N and UBS AG (UBSN.VX) -- all hard hit by the exposure to subprime mortgages and related investments.

Sovereign funds have faced a backlash from government officials and others in the West worried that their investments could be politically motivated, prompting calls for greater transparency.

"There are lots of hypothetical threats, but those arguments are very weak," Wang said. "The reality is that we're facing rising nationalism and protectionism. That's not just because of sovereign funds but also because of globalization."

He added that inviting media coverage and disclosing the size of its deals with U.S. firms had laid CIC open to domestic criticism that it was investing too much abroad.

Wang contrasted the Chinese sovereign fund's approach to that of The Government of Singapore Investment Corp (GIC).

"We just paid a visit last week," Wang said of the Singapore fund. "They said the money that they invested in the U.S. -- they didn't disclose -- so they couldn't have criticism like that."

In reply to a request by the Group of Seven rich countries to examine best practices for sovereign wealth funds, the Paris-based Organization for Economic Cooperation and Development (OECD) has concluded no new regulations are needed because the funds have invested on purely commercial, rather than political, grounds.

Of CIC's $200 billion in initial assets, about $70 billion to $80 billion will be invested overseas, mostly indirectly through funds, Wang said, while a small amount will be invested directly.

Wang said on Wednesday that CIC aimed to set up a diversified portfolio of seven traditional and alternative asset categories, including private equity and hedge fund investing.

Fund management firms have been eager to win mandates to invest CIC's funds, and Wang said the firm was paring a list of about 100 equities funds and a smaller number of fixed-income funds. Fund manager interviews would start next week, he said.

Of its initial capital, CIC has spent another third buying investment vehicles used by the central bank to recapitalize domestic banks. It has earmarked the remainder to bolster the balance sheets of other domestic banks.

(Editing by Tony Munroe and Lincoln Feast)