CIC looks to US deals, fears bubbles, trade rows

China's sovereign wealth fund wants to increase its direct investment in the United States but is warned it won't find cutting deals easy.

Tensions over trade between the United States and China have threatened to bubble over since Donald Trump claimed the White House a year ago. But it's done little to diminish China's appetite for deals – and the country's $900 billion sovereign wealth fund is eager to get in on the act.

But China Investment Corporation (CIC) isn't ignoring the tension, acknowledging that an unfavourable trade relationship is a key threat to its hopes of building up direct investments across the Pacific.

“CIC needs to adjust its investment in the US; we wish to gradually increase direct investment in the US – which of course would take some time –while keeping investing in the open market there,” Tu Guangshao, vice chairman and president of CIC, said on Monday.

Sector wise, Tu said CIC would seek more opportunities in TMT and healthcare.

CIC has already enjoyed the benefits of investing the booming US stock markets.

The MSCI USA Index, which covers approximately 85% of the free float-adjusted market capitalisation in the US, returned 21.19% for the year to December 29, 2017, compared to 10.89% in 2016 and 0.69% in 2015. In December, the Dow Jones hit its 70th all-time high of 2017 after the Trump administration pushed through a $1.5 trillion tax reform plan.

But that also means stock valuations have been pushed to historic highs, noted Tu, speaking at the Asian Financial Forum (AFF) in Hong Kong. “I personally think there are more or less some bubbles in US stocks.”

The US market makes up the biggest share of CIC’s foreign investment; approximately 40% of its non-China allocation resides in the US, according to Tu.

But most of the fund’s investment has been made in the open market. Its non-China asset portfolio delivered a more than 16% return last year, said Tu citing CIC's own estimate, and he attributed much of that result to the US bull run in 2017.

In November, CIC and Goldman Sachs agreed to establish China-US Industrial Cooperation Fund, with a target of $5 billion in commitments and mandates to invest in American companies in industries – including manufacturing, industrial, consumer and healthcare – that have or can develop a material business connection to China.

HSBC’s outgoing chief executive Stuart Gulliver, who sat on the same panel as Tu, echoed the view that US equities are now “expensive” – but pointed the obstacles in making real asset deals.

Gulliver added the “US first” stance from the Trump administration and the trade policy between China and the US did “not contradict making a financial investment into US equities”. But “if CIC is investing in real economy assets”, it will face some balanced thinking of that [trade] policy, which I imagine is being put on hold at the time being,” said Gulliver.

Victor Fung, chairman of logistics and outsourcing giant Fung Group, who moderated the panel, asked about the likeliness of a trade war between China and the US and how that would impact deals.

Gulliver said the probability of a trade war was "not zero", and cautioned that an escalation in trade tensions such as "disputes over dumping" could cause investors "to say actually there’s a greater certainty of return if I invest in X sector in Y country than investing here”.

One key symptom of increased US tension has been the blocking of several big-money Chinese purchases, with Ant Financial’s $1.2 billion purchase of US remittance company MoneyGram becoming the latest cannon fodder earlier this month.

However, Tu sees the threat of a trade war as overblown. “There will be trade frictions between China and the US, but unlikely to be a war, in my view,” said Tu. Of all the options to address the issue of trade imbalance, Tu said opening a trade war was the worst, given it would hurt both nations.

On the other hand, the US could choose to export more technology products to China to address a trade deficit, according to Tu.

“What I have been hearing is that the US seems not so comfortable about tech export to China, but such worry is totally unnecessary. Technology iterations happen very fast, and not leveraging a big market as China to expand a US company’s market share is a shame,” Tu said.

He acknowledges some technologies are used in national security and defence in the US, but a great many are purely commercial products. “There are still a lot of technologies that could be exported to China without compromising national security,” he said.

¬ Haymarket Media Limited. All rights reserved.

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