Update on China’s SWFs

gold chinaLong time friend of the show, Michael McCormack, just sent along his firm’s (Z-Ben Advisors) latest research report on China’s SWFs. I tend to enjoy the research he sends my way, as it typically provides ‘on the ground’ insights about the changing SWF landscape in China. Anyway, this is no exception.

CIC: According to the report, CIC will formally separate from Central Huijin in the next 12 months. Why? To make it easier for the CIC to increase its exposure to US equities. Yep, it appears this story may have been right. And what are the implications of all this? It means the CIC will probably receive a big chunk of cash in return for its Huijin stake, which will be immediately investable overseas (the SWF soap continues).

Guoxin: I noted a while back that SASAC had launched a new holding company for distressed SOEs called Guoxin. (Settle down, class, we all acknowledge this isn’t really a SWF, but maybe you’ll learn something of relevance.) Interestingly, it looks like this entity’s future is quite bleak:

“The majority of Guoxin’s likely SOEs appear to be unprofitable, while others endure shrinking market shares or are simply uncompetitive. Worse, many of these firms are the unsuccessful competitors of SOEs that SASAC will be retaining for itself.”

In order to manage this awful portfolio, the report suggests Guoxin will have to beg for cash from SASAC or sell anything that people are actually willing to buy (and then make cash infusions in the beat-up SOEs).

NSSF: The “other Chinese SWF” will apparently be ramping up its investments in risky assets over the next year:

“In Q4, NCSSF will publicly solicit applications for another round of domestic equity fund investment and may also make its first investments in overseas funds of funds. Both moves will satisfy chairman Mr Dai Xianglong’s long-held ambition to see the fund more fully exposed to higher-risk asset classes, at home and abroad. Of its 20% allowable maximum in foreign investments, NCSSF has achieved exposure of only about 7%, while domestic investments remained skewed heavily towards cash and short -term instruments.”

SAFE: Given the impenetrable secrecy surrounding much of this fund’s operations, it’s not surprising there isn’t too much to report. Still, Z Ben does offer one interesting insight: it’s not secrecy that is SAFE’s problem but, rather, the fund’s irrational and random behavior:

“There is no single theory of SAFE’s behavior, either past or ideal, that can account for SAFE’s moves, nor can we imagine a simple set of competing motives that explains all of the unusual tacks in SAFE’s publicly-visible investing course.

Wow, that’s an interesting assessment. And, so, what do you do if you are trying to work with this fund?

“What we advise is simpler in concept than execution: assume from size and past practice that SAFE might want to buy anything. Understand that you, as mandate manager, are unlikely to have any idea where your piece fits into the larger puzzle. Don’t expect the part of SAFE which specializes in instrument A to have the slightest idea who deals with instrument B, never mind any later letters. Know that relationship maintenance with SAFE will require you not only to make frequent contact but wide contact: no single source will be able to give you a good overview of the organization’s needs.”

Great stuff.

This post originally appeared on the Oxford SWF Project website.