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China wealth fund eyes Asia "as Western protectionism rises"

Lou Jiwei, Chairman and CEO of China Investment Corporation, addresses the Asian Financial Forum in Hong Kong January 20, 2010. REUTERS/Bobb
Lou Jiwei, Chairman and CEO of China Investment Corporation, addresses the Asian Financial Forum in Hong Kong January 20, 2010. REUTERS/Bobb

By Nick Edwards and Kang Xize

BEIJING (Reuters) - China's sovereign wealth fund will focus more of its $482 billion firepower on Asia in twin bids to beat a rise in protectionism in the West and boost exposure to rapid regional growth, chairman and chief executive Lou Jiwei said.

The man charged with stewardship of a slice of the world's largest store of foreign wealth lauded the British approach to overseas investment in public sector projects as one for the world to follow and said the policy response to Europe's debt crisis was a reason to stay underweight bonds and stocks there.

"There is a rise in protectionism in both trade and investment in some Western countries," the China Investment Corporation chief, speaking on the sidelines of the Communist Party congress to choose a new leadership line-up, told Reuters in a rare interview.

"As compared to other financial investors we feel that the scrutiny on us is a little more strict, because of issues like national security," Lou said, adding that while not a major issue yet, he detected rising concern among foreign regulators when CIC partnered with Chinese firms to make acquisitions.

Tensions between Beijing and Washington have recently ratcheted higher thanks to a series of trade actions against China by President Barack Obama, including his blocking of a privately owned Chinese company from building wind turbines close to a U.S. military site, and his challenge of Chinese auto and auto-parts subsidies in a World Trade Organization case.

The U.S. House of Representatives' Intelligence Committee warned last month that Beijing could use equipment made by Huawei, the world's second-largest maker of routers and other telecom gear, as well as rival Chinese manufacturer ZTE, the fifth largest, for spying.

Canada has twice delayed a decision over whether to allow a $15.1 billion bid by CNOOC Ltd <0883.HK>, China's top offshore oil and gas producer, for Nexen Inc , despite shareholders giving it their backing.

Having tackled some concerns about acquisitions by sovereign wealth funds, such as CIC, in 2008 through the adoption of guidelines brokered by the International Monetary Fund, known as the "Santiago Principles", governments worldwide now bristle at the rising number of investment bids for strategic assets made by state-backed firms that fall outside that framework.

Lou said CIC would not change its strategy of partnering with Chinese firms simply to assuage concerns of foreign regulators - particularly if such a partnership presented the best-value proposition to the fund, which is mandated to boost returns on a substantial chunk of China's $3.29 trillion stash of foreign reserves.

NO WELCOME, NO INVESTMENT

"We would avoid investing in countries that do not welcome us. There are other places to invest," Lou said.

Asia is a particularly favored option for CIC, thanks to some of the fastest rates of growth and development in the world - which are themselves levered to China's own economic dynamism.

But while Asia is a target, the region's relatively shallow and under-developed capital markets make investments harder and prevent CIC investing as much as it would like.

"We would have to do direct investment projects one by one. That is very time consuming and we cannot really deploy that much investment capital into it," Lou said.

For now, liquidity makes Europe and the United States CIC's markets of choice for investments in publicly traded securities, while the UK is the fund's top infrastructure pick.

"We like the UK. It is very open on its infrastructure sector," he said, adding that Britain's use of private capital to build public sector assets was a model for other developed economies to follow - particularly those struggling to recover from the effects of the 2008-09 global financial crisis.

"Infrastructure investment can boost economic growth and employment and in fact it is fiscally neutral," said Lou, a former vice minister of finance regarded by Beijing insiders as either a future finance minister, or central bank chief.

Lou said the balance between growth and fiscal rectitude was key to Europe's ability to escape from a debt crisis that has dragged on for more than three years.

"Although people in Europe have agreed that they need a combination of growth and consolidation, in fact these two aspects are contradictory to each other and Europe hasn't really thought out a way to move forward," he said.

"The risk of the euro zone falling apart has now dropped to less than 20 percent, but it is still there. To look on the bright side, now Europe has an agenda compared to a while ago when there was only babbling."

UNDERWEIGHT EUROPE

That overhanging risk and the inability to persuade investors that a recovery plan is firmly in place are key to CIC being underweight on European bonds and equities, Lou said.

"That demonstrates somewhat our lack of confidence," he said. He added that the fund was on the lookout for assets in Europe's real economy - particularly among manufacturers.

"We believe that the manufacturing industry in Europe is still quite competitive and we believe that the European economy will recover some day," Lou said.

But European banks and peripheral euro zone sovereign debt were definitely off his shopping list.

"We dare not touch the banking sector there because we do not know how many more problems are there," he said.

"We would not buy peripheral country bonds because they do not fit our risk/return profile," Lou said. "Most importantly, the risk and returns of these bonds are determined by politics and it is very hard for us to make a judgment (on them)."

Judgment was becoming more important all round, Lou said, pointing out that easy pickings for investors had disappeared since 2009, when asset prices collapsed as the global financial crisis raged and buying cheap was an obvious strategy.

"We have to use more precaution and really watch the risks and how well the companies operate," Lou said.

But a tougher approach to investment management appears to be paying off on CIC's bottom line.

The fund suffered a 4.3 percent loss on its international portfolio in 2011 as total profits fell 6.1 percent on the year to $48.4 billion. Lou is confident that won't be repeated.

"We expect to book no loss by the end of this year. We are pretty satisfied with the performance so far, but we really cannot predict that it will be as good at the end of this year as it is today," Lou said.

"Nobody can predict what happens by the end of this year unless they liquidate all of their portfolio and lock in the returns. But nobody would do that."

(Editing by Nick Macfie)

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