Beijing’s Remarkable Impatience

Ashby Monk

Despite having an astoundingly good 2009, the China Investment Corporation has had a very bad 2010 (…and who hasn’t?…). Its portfolio is apparently down 10%, which represents a net loss of $30 billion. That’s a lot, to be sure, but, the CIC is a SWF, which means it has the luxury of taking a long-term view and not panicking about short-term fluctuations in the market. Right? Well, that’s at least the theory…and it looks as though the CIC is proving the theory wrong in practice.

Indeed, Reuters has a great article this morning in which two unnamed sources with direct knowledge of the CIC’s investment strategy talk about Beijing coming down hard on the CIC to improve its short-term returns:

“Under pressure from Beijing to post better returns, China’s sovereign wealth fund has placed a greater emphasis on short-term performance this year, two sources with direct knowledge of the fund’s strategy said.”

Wait, what?! Why? Here it is directly from one of Reuters’ sources:

“They have a serious concern about portfolio performance from the perspective of less than one year, which is slightly surprising to me because I would have thought a sovereign wealth fund hiring offshore fund managers would give them 3 to 5 years to perform.”

“Slightly surprising” is euphemistic for what this is…I’m dumbfounded by this. The CIC had _an awesome_ year in 2009. Why would the central government be putting pressure on it now? I defy you to find me a large and well-diversified long only institutional investor whose portfolio is not down 10% this year.

Theoretically, the CIC is in an extremely favorable position. With no pressing liabilities, it should be using this downturn to pick up assets that have been unfairly (cheaply) priced, in particular those in illiquid markets. However, this pressure from Beijing appears to be pushing them in the opposite direction:

“…the world’s fifth largest state-run investor may prefer more liquid investments such as equities.”

So, if we are to believe this story, the CIC is being forced by China’s political leadership to give up its most important, strategic, long-term, competitive advantage — its investment time horizon — in order to generate some short-term returns.

Why? Well, I’m guessing much of this has to do with internal conflicts for resources that have been going on for (what feels like) ages. Indeed, we heard again yesterday that the internal debate about topping up the CIC with more foreign exchange reserves is not yet resolved. Maybe the State Council has told the CIC that if it wants the additional capital, it has to show the returns…and right now.

You know, despite all the theory about SWFs being the longest-term investors in the world, I routinely find myself looking at this type of counter-factual that shows how, in practice, these funds take the short-term view. As it turns out, these funds often have similar time horizons as their institutional cousins in the private sector. It appears that government shareholders can be just as impatient as their private sector counterparts…

3 Responses to “Beijing’s Remarkable Impatience”

  1. 1 Rien Huizer June 11, 2010 at 2:02 pm

    “It appears that government shareholders can be just as impatient as their private sector counterparts…”

    Maybe, maybe something else. CIC is an intrument of opaque policy making and, like most things in PRC Central, tossed around in order that no one owns it completely. Maybe.

  1. 1 Rethinking the ‘W’ in ‘SWF’ « Oxford SWF Project Trackback on July 9, 2010 at 6:10 pm
  2. 2 The Strategic (Dis)Advantages of Being a SWF « Oxford SWF Project Trackback on October 19, 2010 at 10:16 am

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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