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China's US$941b sovereign fund prepares request to invest at home

[BEIJING] China's US$941 billion sovereign wealth fund wants permission to invest in domestic stocks and bonds for the first time, people with knowledge of the matter said, as it tries to end restrictions on its mandate following government moves to open up financial markets.

China Investment Corp has laid the groundwork for an application to the central government to let it invest in domestic capital markets, the people said, declining to be named as the deliberations are confidential. It isn't clear whether CIC has submitted the request or whether authorities would grant approval, they said.

European stocks pared gains before rebounding and futures on the S&P 500 Index erased an advance after the news.

Letting CIC invest at home would add a deep-pocketed buyer at a time when China's equity and bond markets are under pressure from a trade war, a slowing economy and rising defaults. At a public forum last month, CIC's head of asset allocation Fan Hua said she saw "very good opportunities" in A shares and yuan-denominated bonds should the fund be allowed to invest.

The valuations of domestic shares are "very attractive" after recent declines as compared to other markets globally, Ms Fan told a forum in Beijing on June 29. Many Chinese companies still enjoy robust profitability even as the economy slows, she said.

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CIC has been primarily restricted to investing overseas since it was set up in 2007 with money from China's swelling foreign-exchange reserves. The fund is turning its eye on domestic securities as Chinese stocks have gained inclusion in MSCI Inc's indexes for the first time, widening their appeal to overseas investors. The government has also taken a series of steps to widen foreign investors' access.

CIC reported its best annual performance ever in 2017, 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, company executives have said.

An email to Beijing-based CIC went unanswered, as did a fax sent to the State Council.

CIC had US$14.8 billion in cash and bank deposits at the end of last year, according to its annual report. That money includes cash held by Central Huijin Investment Ltd., a unit that owns stakes in large state-owned banks but rarely trades. The CIC International and CIC Capital units invest in foreign-currency assets.

Almost two-thirds of CIC's overseas portfolio was farmed out to third-party asset managers as of Dec 31. Changing the fund's mandate to include domestic securities would remove a potential conflict should those firms want to invest onshore, one of the people said. Just over 1 per cent of CIC's overseas portfolio, the size of which isn't publicly disclosed, was in cash as of year-end.

Domestics stocks might be appealing to an investor willing to stomach near-term risks. The Shanghai Composite Index entered a bear market last month and is down 26 per cent 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 serve to 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 reserves quickly and gains in the yuan's exchange rate undermined exporters.


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