Third major transformations for CIC’s investment strategy
Recently, Ding Xuedong, director of China Investment Corp. (CIC) said in the Financial Times that, the company paid more attention to agriculture last year. In future, it will make more investments in global agriculture and ‘links of the whole value chain’, including irrigation, land reclamation and animal feed production, which are not valued by large investment organizations.
This means CIC will make the third investment strategy change since 2007. In 2007 when CIC was just established, the company is committed to equity participation of American financial institutions. But in subsequent financial crisis in America, CIC’s investment suffered paper loss. Then CIC started to shift its focus to overseas investment, including energy, metals, mining and infrastructure. These investees are mainly non-listed companies, lacking transparent market benchmark in terms of their pricing. So the investments’ profit and loss is not as transparent as its previous ones. But according to report made by State Auditing Administration, from 2008 to 2013, there are 6 loss projects, 4 floating loss projects and 2 facing loss among its overseas investments.
Currently international and China’s economic situation are not clear. Continuous growth of energy and raw material’s prices also lack economic basis. It is highly risky to invest in these fields. Since 2008, global grain prices have grown constantly. Considering over 10% ratio of imported grains to total supply, more are calling on enhancing China’s grain safety. CIC hence changed its investment strategy. Therefore it’s not difficult why the company invest in global agriculture.
But investment is not a easy thing. CIC is a fledging company. Since its establishment, it has assumed great responsibilities. Problems are found everywhere. According the report of Auditing Administration, there is misconduct of management, shallow investigation, neglected management after investment, improper hiring of external management staff and delayed appointment of management personnel in this company. The company is not unable to dominate a sovereign wealth funds of hundreds of billions USD.
As China’s overseas investment develops deeply, investors gradually realized the great difference of China’s and foreign investment environment, such as labors and environment. Appealing assets, such as energy and mining in Africa, are not controlled by capitals in developed countries because it is highly risky to do so. This is a main adverse investment background for CIC.
Agriculture is even more risky than energy or mining. Agricultural products’ pricing fluctuates sharply. Prices of domestic farm products rise and fall greatly like roller coaster, except staple food grain such as rice which is controlled. Meanwhile, agricultural infrastructure is a long-term process. It’s very difficult to quit. From infrastructure, such as irrigation to production of agricultural primary commodity, obstacles of internal management and external product safety supervision post great pressure. Even well-established domestic investment organizations lack mature model of agricultural development, let alone the newcomer, CIC.
It’s hard to gain profit in this field. Usually, entrepreneurs are regard as the best people selected for taking this responsibility. After gaining profits through their own wisdom in investment, they will be greatly motivated to make more money. Investment more emphasizes personal wisdom and capability than other general commercial behaviors. That’s why many reputed private equity apply partnership, in which investors gain dividend with their wisdom and vision, rather than just a salary.
Are there any motivations for top management of CIC to make profit for CIC? An ingenious investor in CIC can not get a large amount of dividend like partnership enterprises. They may establish their own business long ago if they are really talented like Warren or Masayoshi Son. Investment loss is not a big deal if CIC officials haven’t violated disciplines. As we know, many members of CIC board of directors and the Executive Committee have administrative ranks. They will not be dismissed.
Loss is not avoidable. That’s market rule. If we lose our own money, that’s fine. We assume full responsibility. But if we lose our clients’ money, we must be responsible for the investors. Does the risk of CIC’s current investment strategy welcomed by all tax-payers?
Funds of CIC come from foreign exchange reserve. When asset account is liberalized, foreign exchange is in the hands the public. They will use the money for overseas investment or consumption on their own, unrelated to the government. But capital account is restricted. The government takes charge of foreign exchange collection. Firstly, it should consider how to remove foreign exchange control and transfer the funds to the public. In this way, the government will not be disturbed by issuing monetary base to sterilizing funds outstanding for foreign exchange and inflation. So reforming foreign exchange management system is top priority for handling foreign exchange so that to reduce its scale at any time. But it seems that CIC is developing very fast, becoming a beneficiary of current foreign exchange system.
Although foreign exchange reserve’s values have to be retained or appreciated due to slow reform. The focus should still be retaining its value, as CIC lacks the capacity of value appreciation and assuming relevant risks. This means the decision makers and the public should not expect too much returns from CIC. Risk evasion and liquidity is its investment focus.
Published in Xinmin Weekly | 2014-6-25
