Integrated Markets Thwart Liquidity of China's Sovereign Wealth Fund

(November 17, 2011) — The head of the China Investment Corp. has asserted that as markets become increasingly integrated, it is more and more difficult for the sovereign wealth fund to rid itself of sovereign debt investments. 

“When we talk about international investments, we must consider whether they serve our interests,” the fund’s president Gao Xiqing said during a forum in Hong Kong, according to Bloomberg. “We can’t say that we’re a generous nation and we can help you at whatever economic costs to us.”

Gao added that increasingly integrated markets make the country’s financial security “more complex.” 

In August, CIC Chairman Lou Jiwei voiced similar sentiments following the release of the fund’s 2010 annual report. “The international investment environment is getting more complicated, and there’s great uncertainties towards sustained global recovery and growth,” Jiwei said in the fund’s 2010 annual report, referencing factors such as the eurozone crisis and soaring commodities prices. According to the CIC, the fund decreased investment proportions in North America and Latin America in 2010 while upping its exposure to the Asia-Pacific region, Europe and Africa. The annual report showed that the CIC’s global investment portfolio yielded a 11.7% return rate in 2010, about in line with gains achieved the previous year when returns were driven largely by heightened bets on commodities. In terms of asset allocation, the CIC funneled money into private equity, infrastructure projects, direct investment and real estate. Meanwhile, alternative investments increased to 21% of the global portfolio from 6% in 2009.

A recent analysis by J.P. Morgan revealed that sovereign wealth funds are reconsidering their investment strategies following low performance in equities against low-yielding fixed-income. “Ten-year returns on government bonds have been generally superior to those of public equities. However, these returns have been driven by large falls in bond yields,” Patrick Thomson, Global Head of Sovereign Wealth at J.P. Morgan Asset Management, said in a statement. “This fall in prospective government bond returns, combined with continued sovereign credit crisis and the ongoing volatility in equity markets, has encouraged many sovereigns to take a fresh look at the way they invest.”

Thomson continued: “Analysis of recent market events has also highlighted the fact that returns cannot be adequately modeled using normal distributions; therefore, investors need to consider the impact that ‘non-normal’ returns have on asset allocation.”

According to J.P. Morgan’s analysis, more than 50% of sovereign wealth fund assets are typically invested in publicly listed equity. A total of 31% are in bonds and cash, with the remaining amount in alternatives, including hedge funds, commodities, property or infrastructure.