China’s sovereign wealth fund space set for shake up
28 Sep 2012
China's sovereign wealth funds are due to undergo a host of changes, as they continue to strengthen their offshore presence. Against growing headwinds, China Investment Corp, the National Council for Social Security Fund and the State Administration of Foreign Exchange have each managed to maintain positive growth of their domestic assets since 2009, and all three have cemented positions among the top fifteen SWFs globally in terms of assets.
While the three major funds have undergone rapid development in recent years, diversifying their onshore allocations and expanding their presence and investment spread internationally, Shanghai-based Z-Ben Advisors says in its China Sovereign Wealth Funds Report 2012, that a slew of more fundamental changes are on the horizon. Also possible is the establishment of additional SWFs that would likely be smaller and have a narrower scope than the existing funds, while state-owned enterprises might carve out their own investment niches using foreign exchange reserves allocated by SAFE.
An ever-sharper focus on private equity and alternative investments is expected to define the development of CIC, China's "official" SWF and the fifth-largest in the world with AUM of about $482bn. This could offset the damage incurred if wholly-owned subsidiary Central Huijin is spun off from the fund, which looks likely to happen by the end of 2013.
CIC is expected to ramp up PE and alternative allocations to between 60% and 70% of its holdings in the long-term, while its "allocation [strategy] and indifference towards short-term yields will become a portfolio model for other institutional investors".
"CIC will soon start making more efforts to establish rep offices abroad, and solidly increase its portfolio allocations into PE, eventually becoming a PE-investment benchmark for institutional investors," says the financial advisory. The fund will come to dominate major resource, power and infrastructure investments in Asia through partnerships with other SWFs, SOEs and global PE firms, and "could be one of the most important individual PE investors in Asia" by 2019.
The NCSSF will join CIC in growing its PE allocations and could elect its first foreign GP as early as next year in a bid to hit its RMB50bn ($7.93bn) target for PE/VC investment. A fourth batch of asset manager mandates is also likely to be on the cards.
AUM is set to rise in the near-term as provinces with large individual pension accounts such as Zhejiang, Jiangsu and Shandong turn to the fund to manage their surpluses - though this will depend partly on the outcome of Guangdong's RMB100bn mandate. The province became the first to issue a mandate for local government-sponsored funds earlier this year.
In addition, growth in AUM from individual-pooling local pension accounts is expect to pick up pace, with the CAGR estimate to rise to 20% from 2012 to 2019, up from 15% between 2006 and 2011. The 13 regions that operate such accounts are increasingly seeking vehicles to boost returns, with cash holdings being the only real alternative to NCSSF mandates. Thus the four of these regions that have yet to mandate to the fund - Beijing, Shanghai, Sichuan and Fujian - are likely to entrust it with at least part of their AUM in the next five years.
"We expect to see approximately 20 regions entrust part of their pension assets to NCSSF by 2019. NCSSF will lean more towards a mid- to higher-risk portfolio that reaches out to external managers to maximise gains."
Following the furry of measures to free up China's capital account in recent years, SAFE will continue to enlarge the scope and scale of RMB utilisation with further development of current cross-border investment products. Expansions of the quota issuance and investment scope of these products are likely to be major features of 2013, along with efforts to enhance the domestic financial system by broadening cross-border credit markets and improving monitoring supervision.
"We expect SAFE to form new asset classes to guide HNWI and institutional assets overseas in the coming years, and foreign firms will be granted roles as fundraisers and managers of such programs," says the report. Pilots of sophisticated products like FX forwards and swaps are also likely to be accelerated.
Outside the big three, smaller SWFs such as the China-Africa Development Fund and China Development Bank are developing increasingly important roles. And on the horizon is the formation a "financial State-owned Assets Supervision and Administration Commission", which will centralize the supervision of state-owned financial enterprises overseen by Central Huijin, the finance department of the Ministry of Finance, the China Banking Regulatory Commission and the People's Bank of China.
Author: Orlando Bowie