Sovereign fund's stock picking

Not that CIC, China’s foreign investment vehicle, needs further capital injection, but it’s reassuring to know the 200-billion fund is guaranteed unlimited ammunition should things get bigger in the next 3-5 years. Given the dampening demand in exports and China’s increasing exposure to currency risk, sovereign investment will give the central government more scope for maneuvering the flow of its foreign reserves. This will not only mitigate Yuan’s upward pressure, but also help to adjust global trade imbalances.

CIC’s recent recruitment of 30 market experts is part of the plan to move away from external management and towards a more active investment style. Apparently CIC still has a thing for Private Equity, but the expensive lesson with Blackstone is probably what prompted the corporation from the backseat to the driver’s spot: as the newly established Private Equity department within CIC will tell you that it now prefers to be proactive than stay a passive investor. Consequently, CIC investment portfolio will likely have a heavy weighting on industries that are more sustainable and forward-looking.

Renewable energy, among others, will be of the greatest interest to the fuel-guzzling nation. While it may be surprising to some, China’s environmental efforts in the past 3 years will put many developed economies to shame. Indeed, China can not sustain rapid growth without paying more for the environmental costs, which is why a lot of green initiatives are now being orchestrated by the government’s stimulus program, as well as by investors who have a long –term perspective on the country’s energy needs.

The bright outlook presents many opportunities to invest in green technologies; both domestic and overseas start-ups are ideal candidates and most are desperately in need of funding. In addition to offering high returns, green stocks also have the advantage of being less politically controversial, thus allowing relatively easy sources of capital inflow.

Sovereign fund investments in sensitive industries are not so promising, however. The fallout of Chinalco deal suggests that China’s overseas ventures will continue to be under great scrutiny. In 2009, the issue surrounding sovereign fund transparency has been addressed by many through portfolio and internal structure disclosure, but a government-controlled investment still resembles a Private Equity investment: much unknown and little regulation. Rather than try to convince, perhaps a more feasible way would be investing in small doses to avoid conflicts of interest.

As the reserve currency’s concern continues to dominate the central government’s agenda; CIC will, over time, prove to be the most effective tool to help China diversify away from the dollar.