Mystery Fund Amassing Japanese Equities?

Ashby Monk

French newspaper Les Echos is reporting today that a “mysterious fund”, which it believes is linked to the China Investment Corporation, has been amassing large equity positions in some of Japan’s biggest companies. Yann Rousseau has the scoop (in French) from Nikkei Veritas. Apparently, an Australia based fund called SSBT OD05 Omnibus China Treaty (OCT) has, since 2008, accumulated roughly $22 billion in Japanese equity positions across a range of firms. This includes 2.1% of Hitachi, 1.7% of Nomura Holdings and 1.7% of Mitsubishi. To date, the OCT has been entirely passive (and rather discrete).

According to Rousseau, the fund’s (possible) connection to the CIC is raising a few eyebrows in Japan. If you recall, China ramped up its purchases of yen denominated assets over the summer, a move which caused concern for some Japanese policymakers due to the strength of the yen. Finance Minister Noda said in September, “I do not know what their true objectives are, but we would like to clarify their objectives.”

The question, then, is whether OCT is in fact a CIC subsidiary that was set up in Australia to fly under the Japanese radar in order to avoid causing further diplomatic tensions as China accumulated more yen assets. I have to say, that’s a bit hard to swallow.

Still, the CIC has routinely used wholly owned subsidiaries in foreign countries to facilitate its investment operations, such as Beijing Wonderful Investments, Stable Investment Corporation, Fullbloom Investment Corporation, and Best Investment Corporation (among others). But these special purpose vehicles were never meant to be secrets; the CIC has been pretty transparent about their existence and uses.

My guess as to what’s going on here is firmly rooted in the principle of Occam’s razor: If this is indeed a CIC subsidiary (which is still an open question), the Japanese and Australian authorities have probably been well aware of its existence from the start. So the only “news” here is that we (the general public) are just now learning about OCT for the first time.

But, if I’m wrong, we could be in for a really intriguing story…

8 Responses to “Mystery Fund Amassing Japanese Equities?”

  1. 1 Rachel February 3, 2011 at 8:46 am

    nice piece.
    I wonder if it might be linked to SAFE not necessarily CIC. given the size of the CIC’s international portfolio US$22 billion is a lot, but its not a lot compared to SAFE’s US$2.85 trillion in reserves, and we do know that SAFE subsidiaries acquired a lot of foreign equity in the past, including some headquartered in HK. just a thought. As you note given China’s official move in and out of Japanese short term assets in 2010, this is quite interesting.

  2. 2 Ashby Monk February 3, 2011 at 9:15 am

    Rachel: Well spotted. And SAFE has used subs in Hong Kong if I’m not mistaken. That’s a more likely scenario. Cheers!

  3. 3 Rien Huizer February 3, 2011 at 5:57 pm

    1. SSBT stands for State Street Bank& Trust. 2. Probably domiciled in Australia for the 2009 tax treaty Jap/Oz. Same fund has similar stakes in other Jap blue chips like Sumitomo-Misui Ins., Sony etc. If SSBT administers on behalf of a Chinese state entity, that entity is probably a passive investor with a global diversification strategy and very deep pockets. Not CIC.

  4. 4 Ashby Monk February 3, 2011 at 6:49 pm

    Thanks, Rien. Very useful. So it’s safe to assume it’s SAFE then… ;)

  5. 5 MMcC February 4, 2011 at 12:31 am

    According to some old coverage in Asahi Shimbun, the fund began buying Japanese equities in mid-2007, which makes CIC less likely as an owner than SAFE. It is Sydney domiciled, and mid-2007, from memory, is around the same time PBoC set up its first Australian office – in Sydney, as it happens.

  6. 6 Darrel Whitten February 8, 2011 at 3:16 pm

    The SSBT OD05 Omnibus Treaty account is a State Street Bank and Trust custodial account in Australia. The bulk of holdings in this account are believed to be holdings of the three China SWFs, China Investment Corp., SAFE Investment Co. and the National Social Security Fund, who all are now investing in Japanese equities, the nominal amount of which is now believed to be over JPY2 trillion, making the China SWFs the 10th largest holder of Japanese equities, and rivalling in value of holdings Japan’s largest asset management companies. These three China SWFs now have upwards of $850 billion, making their combined AUM larger than Abu Dhabi Investment Authority, heretofore the largest SWF. With China’s forex reserves now topping USD2 trillion, it is only natural that these SWFs and the China government would seek to globally diversify their forex reserves as well as their investments.

    These holdings are believed to be pure portfolio investments managed by international asset management companies, not direct investments like the CIC stake in Morgan Stanley or Blackstone, and the balance of holdings have risen significantly over the past year. Japanese companies however have been aware of China SWF holding for two years or more.

    • 7 Ashby Monk February 8, 2011 at 3:19 pm

      Thanks, Darrel. Very useful and interesting. I wouldn’t have thought the three funds would co-invest in this manner…but why not? Segregated account at State Street means lower fees etc.

  7. 8 Guillaume February 17, 2011 at 12:29 am

    Here is an article found on the website of The Nikkei (japanese newspaper) that could help to maintain the CIC hypothesis :

    Sunday, January 30, 2011
    Inflows Of China Money Into Japan Unstoppable: Former Toshiba CEO
    TOKYO (Nikkei)–Investment in Japanese assets is set to rise as China’s sovereign wealth fund turns its focus to opportunities in Japan, but rather than losing sleep over this, the Japanese government should lure more foreign investment by promoting financial deregulation, said Taizo Nishimuro, the former president of Toshiba Corp. (6502).
    Nishimuro serves on an international team of advisors that provides guidance to China Investment Corp., the country’s massive sovereign wealth fund. CIC is increasingly drawing attention to Japanese stocks at a time when Chinese investors are becoming a growing presence on the Japanese bourse.
    The 75-year-old Nishimuro, who also continues to play an advisory role at Toshiba, is the sole Japanese person on the international team of advisors at CIC, which currently manages 300 billion dollars worldwide.
    The Nikkei Veritas recently interviewed Nishimuro about the Chinese sovereign wealth fund. Excerpts from the interview are included here.
    Q: You became an advisor to CIC in 2009, right?
    A: At that time, I was chairman of the Tokyo Stock Exchange. CIC asked me to become an advisor, possibly because they viewed me as knowledgeable about China and the global economy. I was the only Japanese candidate, so I decided to accept the offer, because otherwise they wouldn’t have a Japanese voice on their advisory team.
    CIC’s international advisors attend a big meeting in Beijing once a year. We also offer advice as necessary. CIC’s top managers and ministerial-level officials from the Chinese government also attend the meetings. We review reports on investment results from the previous year, as well as investment policies for the next fiscal year. We are then asked to offer our views. For your information, we receive no payment for this, other than travel expenses.
    Q: What kind of advice did you give at last year’s meeting?
    A: CIC incurred investment losses due to the Lehman shock in 2008. In 2009, it began to gradually resume overseas investment. All advisors were asked to comment on its plans to sharply increase overseas investment in 2010. The advisory team agreed that CIC should invest aggressively. Some of the advisors suggested investing in fields related to natural resources and environmental protection.
    Q: How does CIC view Japanese stock investments?
    A: Of the questions they have directed at me, they have asked how they should proceed with Japanese stock investments in fiscal 2010. CIC had not made any noticeable investments in Japan until 2009. Around May or June 2010, a CIC official said Japanese stocks were undervalued in comparison to other stocks. CIC is aggressively increasing its staff, and some of its employees appear to be specializing in Japanese stocks.
    Q: Do you think Japanese stocks are undervalued?
    A: Yes, I do and told them so. Though I have questions about Japan’s policies, Japanese individuals hold massive amounts of attractive financial assets.
    Japanese companies are boosting their overseas earnings. Even Tokyo Electric Power Co. (9501) and East Japan Railway Co. (9020) are looking at the possibility of exporting. We are going to see companies emerge that are able to continue growing sharply regardless of Japan’s gross domestic product.
    I told CIC that they would attract too much attention if they invested in Japanese stocks on a large scale. Even without explicit instructions from Beijing on where to invest, in Japan CIC’s actions could be viewed as representing the will of the Chinese government. I told them that they should make small, low-profile investments by giving careful consideration to future relations between Japan and China.
    Given the size of CIC’s assets under management, however, even their small investments are fairly large.
    Q: While CIC does not appear on the list of shareholders at companies, there are major shareholders at a growing number of major firms who are believed to be representing Chinese investors.
    A: Chances are high that this include investments by CIC, although I am not aware of specific investment results. I believe CIC is investing in Japanese shares.
    I suggest that they invest through intermediary financial institutions, rather than directly under CIC’s name, because it would be less noticeable. In any case, an inflow of fresh funds into the Japanese stock market would be good for Japan.
    Q: As the real investors behind these representatives are unknown, some experts warn that this practice could lead to hostile takeovers or technology loss.
    A: From the perspective of business managers or stock exchanges, investments should be as transparent as possible. But investors do not want to arouse speculation through specific investments, so they use these custodians.
    The Japanese are generally sensitive about the emergence of big shareholders, especially Chinese ones, so the presence of invisible investors is unavoidable to a certain extent.
    But there is absolutely no reason for concern. While CIC is aggressively investing in Canadian and Australian stocks related to natural resources and the environment, I don’t think they are interested in controlling Japanese companies — at least for now. CIC wants to secure stable returns on investments using 300 billion dollars provided from China’s foreign-exchange reserves. The acquisition of technologies is not its objective. They have to take Japanese stocks into account for the sake of maintaining balanced investments.
    Q: Japanese companies have been significantly affected by tensions over the Senkaku Islands and China’s virtual ban on exports of rare earth elements. How should we deal with Chinese money?
    A: Inflows of funds from China into Japan will continue to increase, and Japanese investment in China should also increase. This is natural, given the size of the Chinese market, Japan’s technological prowess and geographical proximity.
    There have not been any major changes in the bilateral relationship, even since the Senkaku problem. The two countries should continue to deepen their relationship and overcome mutual problems.
    Q: The Shanghai Stock Exchange was Asia’s biggest bourse in terms of trading value in 2010 but the Tokyo market ranked second, giving up the top spot for the second year in a row. Investments in Japan seem to be losing their allure.
    A: Japanese exchanges should become friendlier to investors to compete with the Chinese. The Japanese currency is relatively stable and interest rates are very low, so Japan should be favorable to foreign companies looking to issue bonds. Japan should study ways to attract overseas businesses and funds by promoting financial deregulation.
    –Translated from an article by Nikkei staff writer Takenori Miyamoto
    (The Nikkei Veritas Jan. 30 edition)

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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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