China’s sovereign wealth fund has expressed a desire to invest in the domestic market as stock valuations have hit multi-year lows, underscoring how coming home could bring it new opportunities to boost returns.
The US$941 billion China Investment Corp (CIC, 中國投資) wants permission to invest in local shares and bonds, and has laid the groundwork for an application to the central government, people with knowledge of the matter said.
While it remains unclear if top leaders would grant approval, the potential move by the Beijing-based investor would add an engine of growth to complement an overseas portfolio that posted record returns last year.
China’s equity and bond markets are under pressure from a trade dispute and rising defaults, with the benchmark stock gauge sliding into a bear market last month and slipping again yesterday after data showed an economic slowdown.
Mainland stocks are the cheapest relative to a gauge of Chinese stocks traded offshore in almost four years.
At a public forum last month, CIC head of asset allocation Fan Hua (范華) said she saw “very good opportunities” in Chinese shares and yuan-denominated bonds should the fund be allowed to invest.
Adding to the appeal of stocks listed in China is their inclusion by MSCI Inc in global indices in June.
For CIC, whose mandate since its 2007 inception has been to invest the nation’s reserves offshore, that restriction puts it at a disadvantage to its global peers.
It also creates potential complications because about two-thirds of its overseas portfolio is farmed out to external managers, some of which could already be investing in Chinese shares after the MSCI move.
The valuations of domestic shares are “very attractive” after recent declines, Fan said, adding that many Chinese companies still enjoy robust profitability even as the economy slows.
The growing ranks of local hedge funds, many of which are delivering good returns, would also provide a “sizeable’’ pool of external managers to choose from, she said at the time.
Domestics stocks might be appealing to an investor willing to stomach near-term risks.
The Shanghai Composite Index is down more than 20 percent from a January high. The gauge trades at 14 times earnings, compared with a ratio of 21 for the S&P 500 Index.
A falling yuan could further add momentum to the proposal, as any subsequent conversion of foreign-reserve dollars into local currency would support the yuan.
Allowing CIC to invest in domestic stocks was a lot less palatable when it was set up, a time when a soaring trade surplus drove up foreign-exchange reserves quickly and a strong yuan undermined exporters.
CIC reported its best annual performance ever last year as its stock holdings, which account for the largest portion of its overseas portfolio, benefited from soaring markets worldwide.
The wealth fund is boosting allocations to direct and alternative investments for more stable returns, and to cut exposure to volatile public markets, executives have said.
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