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China diversifies overseas amid warnings of credit crunch – Financial Times

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China is diversifying away from China. The move by the country’s sovereign wealth fund comes as other big investors warn of potential risks facing the mainland.

2016 represented the country’s biggest year for outbound investments as China’s sovereign wealth fund, one of the largest, switched from domestic assets in favour of those overseas.

The action by the $814bn China Investment Corporation came as Singapore’s rival sovereign wealth fund Temasek warned that Beijing may face a credit crunch.

The S$275bn Singaporean group, which posted a gain of more than 13 per cent in the value of its portfolio for the year ending in March, has been a long-term investor in China and its views of the country’s prospects are watched closely.

Temasek, which has a reputation for spotting trends — such as the rise of technology in China — early, singled out the potential threat of a credit crunch in Beijing despite taking a relatively optimistic view of the global economy.

CIC’s investment in billions of dollars of cross border deals prompted returns on foreign assets of 6.22 per cent in 2016.

The results for CIC represent a strong turnround for the group following a negative return of about 3 per cent in 2015. It claims a cumulative net annual return of 4.76 per cent since the group was founded in Beijing 10 years ago.

CIC, which is controlled by China’s State Council, did not give a clear reason for the improvement on its returns on overseas assets but the group emerged last year as one of China’s most acquisitive cross-border buyers, investing about $19bn in such deals last year, according to data from Dealogic.

The surge in outbound investment in 2016 represented a near trebling in overseas M&A for the company compared with 2015, when it spent $6.4bn on foreign assets

Chinese companies’ cross-border dealflow has slowed this year from a record-breaking 2016 after regulators put in place controls on capital outflows.

However, as the investment arm of the state, CIC has appeared unhindered by the constraints, pulling off this year’s largest Chinese deal to date.

CIC in June agreed to buy Logicor, a pan-European logistics company, from Blackstone for €12.25bn, defying an implicit ban regulators had put on deals over $10bn.

Recently, it has become more competitive in global auctions. For example, in the bidding for Logicor, CIC came up against and eventually outbid its more experienced Asian rivals Mapletree Investments and Temasek, said people involved with the deal.

Despite its direct connection to the Chinese state, the group has not shied away from sensitive dealmaking. Late last year a consortium comprised of CIC, Macquarie and several other global investors agreed to buy a controlling stake in the gas distribution division of UK’s National Grid for £3.6bn.

The deal is one of the largest acquisitions of UK infrastructure in recent history and was framed as an early test of the UK’s new rules on foreign investment into this sensitive sphere.

While CIC has displayed strong optimism on overseas investments, Temasek’s investment decisions in 2016 have reflected a more cautious stance.

For example, it divested S$18bn and invested S$16bn over the course of the period, the first time that it sold more than it bought since 2009. That was a disastrous year for Temasek and other sovereign investment firms, which were badly hit by the global financial crisis and the rescue finance they gave many ailing western financial institutions in its wake.

Temasek’s potential bearish scenario envisions more sluggish growth and “reforms that are too slow to rebalance China’s economy and address corporate debt related vulnerabilities,” including a credit crunch as rates in China’s interbank market rise.

Both CIC and Temasek were early investors in Chinese technology. Temasek has invested in Ctrip, Koubei, an Alibaba-affiliated platform, and was also a relatively early investor in Alibaba. CIC has invested in domestic technology companies such as Ant financial, the payments and financial services arm of Alibaba.

CIC also holds large stakes in China’s national commercial banks, through its direct investment arm Central Huijin, as well as a long list of other Chinese financial institutions.

On Monday, Singapore’s other sovereign wealth fund GIC, the country’s largest, posted its worst performance since the global financial crisis, warning of a protracted period of low returns in the years ahead.

The fund’s rolling annualised rate of return fell to 3.7 per cent for the two-decade period to the end of March 2017, down from 4 per cent a year ago and the lowest since 2009. GIC, estimated to manage $354bn of assets, does not publish single-year results but instead uses a 20-year rolling rate.