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China: The World’s Best Opportunity for Asset Managers?
| China’s Institutional Investors
funding mechanism for the SWF. When
that happens, a proven track record
and commitment to areas that CIC is
interested in will be most important
in winning mandates. The best
candidates may be those specialists
with expertise in areas identifed as
important for the “China growth”
narrative, including commodities and
technology. These would likely include
targets that enhance Chinese frms’
ability to expand offshore, or provide
better access to commodities that are
considered critical for the country’s
continued development.
It is within this context that foreign
asset managers need to maneuver
when trying to develop mandate
business with CIC. On the one hand,
there are now additional funds which
can be allocated externally along with
the prospect of a more standardized
funding mechanism moving forward.
That being said, CIC is now working
through a detailed review of those
mandate managers frst picked and
funded back in 2009. The needs and
objectives of CIC are, today, vastly
different from what was the case
three years ago. That then means the
likelihood of a greater-than-expected
turnover among those frms chosen
to run money on behalf of CIC. There
is still expected to be a bias in favor
of alternative asset classes, but in
the long-only space it is currently
projected that CIC will favor those
foreign asset managers with a
strong performance track record or
which operate in a highly specialized
market niche.
State Administration of Foreign
Exchange
The State Administration of Foreign
Exchange’s (SAFE) offcial duties
revolve around sterilizing as much
of the foreign currency infows into
China as possible, in order to maintain
a stable exchange rate regime. For
the better part of the last decade, the
country has relied on an export-heavy
set of industrial policies to realize
extremely strong rates of economic
growth. Over the past several years,
criticism both at home and abroad
have brought to light the need to
rebalance away from investment-and
export-led growth toward a consumer-
driven economy.
Exhibit 7: Institutional Investor Assets by Segment,
2007 – 2012e (RMB)
While the attention paid to SWFs is warranted, insurers and pensions also offer
compelling opportunities
2007
2008
2009
2010
2011e
2012e
0
5
10
15
20
25
Insurers
SWFs
Pension
Trust
GFCs
Brokers
Foundations
Sources: Z-Ben Advisors, Wind
Exhibit 8: CIC Portfolio Holdings by Type
(as of 2010 annual report)
With its extended time horizon, CIC can afford to invest for the long term in
equities and alternatives
Equities
Fixed-Income
Alternatives
Cash
27%
21%
48%
4%
Sources: Z-Ben Advisors, CIC
At present, CIC is dependent on State
Council for new asset injections,
and it recently received another
round of funding totaling a reported
USD50bn. In its last annual report,
the fund was very vocal about how
it had drawn down all available cash
and was fully invested, a clear signal
to its overseers that it was ready for
another injection.
CIC will soon transition from its
frst generation of managers. Since
its inception, it has considerably
improved its fund allocation capacity,
improving its ability to both internally
manage funds and competence
to source and monitor mandates.
Once returns stabilize, it is likely
that State Council will establish a
more normalized — and predictable —