CIC and the National Social Security Fund (NSSF) are increasing their domestic equity exposure and have indicated that further purchases over the next 12 months are likely. Following a torrid year to date for the Shanghai Composite Index, which had fallen nearly 17% since January, the moves were designed to show that China’s leading institutions see value in the current climate and remain confident of China’s long-term growth prospects.
Central Huijin Investment, the domestic division of CIC, recently purchased about RMB65 million ($10.2 million) of shares in the Big Four Chinese banks, and announced its intention to follow up with further acquisitions in the coming year. Financials have been among the hardest hit Chinese stocks as a series of debt revelations dented investor confidence in mainland banks. The MSCI China Financials Index plunged 47% from highs of 540 in late April to just 288 on 5 Oct. The purchase was taken as a signal of a broader shift in macro policy within government and has helped improve sentiment on equities markets.
“The recent purchases can be read a policy signal,” Min Tha Gyaw, Director of Operations at Z-Ben Advisers in Shanghai, says. Premier Wen Jiabao “has recently vowed to fine tune the tightening agenda, so while there’s a perception the SWF’s are coming in to prop up the market, it’s also part of a broader policy change towards greater liquidity tolerance.”
Meanwhile, state media suggested the NSSF has received regulatory approval to invest an additional RMB10 billion of its public welfare fund component in domestic equities. September’s China Monthly Bulletin of Settlement Statistics, shows the NSSF added positions in 16 stocks to its portfolio that month, bringing the total to a record 180 compared with 168 at the end of 2010. Eighty nine of these are listed in Shanghai and the remaining 91 in Shenzhen, according to the report, which didn’t give specific details.
NSSF has established a reputation for making well-timed investments in the domestic markets, a perception that was further enhanced when it pared back its equity holdings in March, shortly before the Shanghai Stock Exchange entered its six month losing streak, tracker data from Huatai Securities shows. The fund’s recent return to equity markets is therefore likely to give some boost to battered investor confidence at a time when domestic and external uncertainty remains elevated.
“Huijin and the NSSF play policy roles, and in the past have come in at the bottom of the market. But there’s also a valuation consideration, and they wouldn’t go in if they don’t see value. So it’s about a balance of valuation considerations and policy direction,” Min observes.
On a more structural level, the evolution of China’s sovereign wealth entities as market-makers and the “advanced guard” of China’s economic and industrial policies as local media suggest the restructuring of CIC has received approval from the State Council.
Huijin, a central government entity which predates CIC and has an explicit mandate to invest in domestic financial shares, is nominally a division of the sovereign wealth fund since the latter was created in 2007. However, this arrangement has been the source of some confusion, particularly with would-be international partners or regulators, hindering CIC’s expansion into international markets.
The restructuring will see Huijin become an independent subsidiary of CIC, while all international deals will be handled by a new entity, CIC International, which will also function as an independent subsidiary. The move is intended to put international partners at ease and facilitate CIC’s international activities, according to Z-Ben’s Min.
“A key change is that CIC is trying to become more independent from Huijin. It wants to shake off the association as it seeks to increase is allocation across the globe, as sometimes the sense that it’s not an independent entity can complicate its dealings offshore.”
In the latest sign of its growing international focus and diversification, CIC has recently been involved in talks with Blackstone to jointly acquire a tranche of the £400 million ($643 million) distressed asset portfolio currently being offered by RBS. This would represent the first time a Chinese entity has taken on distressed assets from a UK bank.
For NSSF, the latest addition to its equity holdings demonstrates its gradual expansion into more active management of funds. However, these purchases have generally been focused in the government’s strategic sectors and serve a more explicit policy function. “NSSF has been more comfortable with helping policy makers signalling their intentions,” Min concludes.