Hong Kong stock market to get major boost from China's new forex agency

Hong Kong stock market to get major boost from China's new forex agency

	Published : Thu, 27 Sep 2007 13:08 By : Agencies Print this Story

HONG KONG (Thomson Financial) - Hong Kong stocks are expected to receive a major boost from fresh capital inflow when China Investment Co (CIC), the company set up to manage part of China's foreign exchange reserves, officially opens this week, analysts said.

The CIC is due to open on September 29 and will manage 200 billion US dollars of China's nearly 1.4 trillion US dollars in foreign exchange reserves, according to the official China Securities Journal, citing sources close to the matter.

Analysts said CIC is likely to allocate to Hong Kong 5-10 pct of the funds it will manage, with investments seen in various asset classes such as equities, real estate and investment holdings.

Fresh capital inflow expected upon its operation should boost investor appetite for local blue chips as well as China concept stocks.

'Hong Kong is a clear beneficiary of possible capital inflows from China's new company,' said Philip Chan, research head at CAF Securities, a unit of Agricultural Bank of China.

Chan expects the newly-established investment company to acquire key Hong Kong assets including stocks with long-term growth potential and those with investments in major infrastructures in the territory.

'Companies with stakes in major infrastructure in Hong Kong will be the likely targets,' he said.

Citigroup economist Joe Lo said he expects at least 2.2 billion US dollars of the 200 billion that will be managed by CIC will be invested in the Hong Kong stock market.

Of this amount, 1.5 billion dollars is likely to be allocated for blue chips while the remaining 700 million will go to H-shares and red chips, Lo said.

'Based on how major portfolios are managed, Hong Kong can't be ignored as among the markets to benefit from the fund,' he said.

Acceptable risks

Apart from equities, Lo said China's new asset management company will invest in corporate notes, real estate and other assets with 'acceptable risks.'

'It will be the asset management's mandate to obtain a higher rate of return than foreign government debt held in the government's portfolio. I believe they will invest in overseas equities and other instruments,' he said.

The People's Bank of China, China's central bank, currently invests a significant amount of its forex holdings in relatively low-yielding assets such as US Treasuries.

Given the country's rapidly expanding foreign exchange reserves and the resulting upward pressure on the yuan, mainland officials have been seeking to channel some of this capital overseas.

The new forex investment agency has already made a 3-billion-US dollar investment in big US private equity fund, Blackstone.

Analysts said they expect Hong Kong to be a key investment destination for the new asset management firm, given the fact that the city has one of the world's most active bourses, not to mention several listings of major China firms.

Hong Kong ranked as the sixth largest stock market in the world in 2006 in terms of market capitalization, with 1.7 trillion US dollars worth of shares listed on the bourse.

'The market could rise by several points more if that happens,' said Kitty Chan, director at Celestial Asia Securities, referring to CIC investing a sizeable amount of its funds in Hong Kong.

'It should support turnover over the next couple of months,' she said.

'Investment of that amount has been widely expected by the market. There's a lot of hot money that keeps helping the market trade higher,' she said.

The Hang Seng Index has been hitting record highs continually since the second quarter and breached the 27,000 level today, spurred in large part by hopes of fund flows from the mainland.

The benchmark 40-stock Hang Seng Index ended Thursday up 634.86 points or 2.4 percent at a record close of 27,065.15, off a new intraday high of 27,166.01.

Volume traded reached 16.62 billion shares worth a record 147.05 billion Hong Kong dollars.

Replicating GIC

Analysts said the investment firm could replicate a Singapore entity, the Government of Singapore Investment Corp (GIC), which manages over 100 bln usd of the city-state's foreign exchange reserves.

With presence in major financial capitals worldwide, GIC invests internationally in equities, fixed income, foreign exchange, commodities, money markets, alternative investments, real estate and private equity.

'It would be investing in major funds, like those in Singapore, and many funds and markets are likely to benefit from the potential investment,' said Citgroup's Lo.

Apart from equities, analysts expect that the new investment fund will provide a further boost to corporate activity in investment assets such as commodities.

State media reported that the central bank's investment arm, Central Huijin, will become a unit of CIC, focusing on bailing out near-insolvent banks.

The new investment company will have 11 board members, including three executive directors, five non-executive directors, two independent directors and one worker's director, the report said.

The three executive directors include are Lou Jiwei, a vice secretary with the State Council, who will also be named CIC chairman; Gao Xiqing, the vice chairman of the National Council for the Social Security Fund, who will be appointed general manager, and Zhang Hongli, a vice finance minister.

The five non-executive directors will come from the central bank, the National Development and Reform Commission (NDRC), the Ministry of Finance, Ministry of Commerce, and the State Administration of Foreign Exchange (SAFE).

They will include vice finance minister Li Yong, vice central banker Liu Shiyu and SAFE head Hu Xiaolian.

The two independent directors are Wang Chunzheng, vice director of the NDRC, and Liu Zhongli, a former finance minister, the report said.

The CIC's top seven officials, according to the report, are Lou Jiwei, Gao Xiqing, Zhang Hongli, general manager of Central Huijin Xie Ping; chairman of Central Huijin Wang Jianxi; director of the investment department of the NDRC Yang Qingwei; and Hu Huaibang, secretary of the discipline inspection commission of China Banking Regulatory Commission.

(1 US dollar = 7.8 Hong Kong dollars, 7.51 yuan)

leonora.walet@thomson.com

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--- by Leonora Walet ---

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