February 19, 2009 / 12:56 PM / 11 years ago

Burnt by financials, China wealth fund shifts focus

HONG KONG (Reuters) - China’s $200 billion sovereign wealth fund is shifting its investment focus to natural resources, fixed income and real estate after it made losing bets on high-profile U.S. financial firms, people familiar with its strategy said.

Jiwei Lou, China's then Vice Minister, Ministry of Finance poses for a group photo at the 10th Asia-Pacific Economic Cooperation (APEC) finance ministers forum in Phuket, Thailand on September 5, 2003. REUTERS/Adrees Latif

China Investment Corp, headed by former Vice Finance Minister Lou Jiwei, has drawn criticism at home over large paper losses on its combined $8.6 billion investments in U.S. private equity giant Blackstone Group (BX.N) and Wall Street bank Morgan Stanley (MS.N).

Sovereign wealth funds have drawn close attention in recent years, in part due to worries in some capitals over foreign governments owning key assets.

More recently, markets have looked to funds such as CIC, Singapore’s Temasek TEM.UL and the Abu Dhabi Investment Authority as potential rescuers of distressed financial firms.

Lou, who is traveling in Washington D.C. and New York this week, is scheduled to meet top executives of Wall Street firms including Blackstone, Morgan Stanley and The Carlyle Group CYL.UL, all of which are keen to attract CIC investments.

However, Chinese government and financial sources familiar with Lou’s thinking told Reuters that chances of such investment are slim, at least for 2009.

Zhou Yuan, the new head of CIC’s alternative investment team, told his staff in a recent closed-door meeting the fund is also unlikely to invest in the near term in any fund of foreign private equity funds, sources said.

An official at CIC’s news office declined to comment.

Early last year, CIC agreed to chip in about 80 percent of a new $4 billion private equity fund launched by J.C. Flowers & Co, with a focus on investments in troubled U.S. financial assets.

The views of Zhou, the former head of UBS UBSN.VX (UBS.N) in China, align with those of Lou, who told a Hong Kong audience late last year that CIC is “not brave enough” to invest in foreign financial firms and lacks confidence in the shifting U.S. financial regulatory situation.

NEW FOCUS

CIC’s latest focus is on natural resources.

A CIC delegation led by Lou wrapped up a trip this week to Australia, where he met Treasurer Wayne Swan, who told CIC that Australia would welcome investments from China, said the sources.

The sources declined to be identified due to CIC’s desire for confidentiality.

On Wednesday, Australian iron ore miner Fortescue Metals Group (FMG.AX) confirmed it had talks with Anglo American Plc (AAL.L) and CIC about possible investment opportunities.

Beyond Australia, CIC dealmakers are also looking at mining assets in Europe and the Americas, industry sources familiar with the situation told Reuters.

“With the recent attention surrounding the fate of many global sovereign wealth funds’ financial investments, it’s no surprise to see a shift in focus away from that sector,” said Kirby Daley, senior strategist at Newedge Group in Hong Kong.

“Aside from the diversification angle, it also makes sense from a geopolitical strategic standpoint for CIC to look at the resource sector,” he added.

The shift of investment focus by CIC from U.S. banks and funds to global resources comes on the heels of two high-profile Australian deals recently made by China Inc.

Chinalco agreed last week to pay $19.5 billion for stakes in global giant Rio Tinto’s (RIO.AX) (RIO.L) aluminum, copper and iron ore assets and convertible notes, while China’s Minmetals bid $1.7 billion for debt-laden OZ Minerals Ltd (OZL.AX), the world’s no.2 zinc miner.

CIC is not the only sovereign fund to shift its investment strategy in the search for safe and long-term returns.

Temasek recently appointed Chip Goodyear, former CEO of top global miner BHP Billiton (BHP.AX) BLT.L to be its new head in a move widely expected to result in stepped-up resources investment by the fund.

CIC is also likely to play a role as a behind-the-scenes backer of deals by major Chinese state-owned enterprises this year, said the sources.

REAL ESTATE & FIXED-INCOME

Beyond resources, CIC will also focus on real estate and fixed income areas, said sources who were briefed on the recent CIC internal meeting.

In real estate, some CIC investment specialists believe property prices in developed markets such as Australia and the UK might bottom out in late 2009, said the sources.

Late last year, CIC hired Collin Lau, a former managing director for Maurice “Hank” Greenberg’s Starr International, to head CIC’s real estate investments.

In a recent hiring notice seen by Reuters, CIC said it was looking for talent “who will do market research of global real estate and infrastructure sectors and study real estate investment trust funds (REITs).” It is also hiring property asset managers, according to CIC job notices.

Meanwhile, CIC has also been adding fixed income staff to its trading floor in Beijing in recent months, said the sources.

At the end of 2008, Beijing-headquartered CIC employed roughly 200 people, the sources added.

Additional reporting by Tony Munroe and Joseph Chaney; Editing by Mathew Veedon & Ian Geoghegan

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