A worthy investment choice

Africa has much to commend itself to sovereign fund

The recently published annual report of China Investment Corp, the Chinese sovereign wealth fund, had encouraging news for all Chinese. The fund had a return of 10.6 percent last year, greatly outstripping its performance the previous year, a loss of 4.3 percent. Given that CIC has billions of dollars of assets under management, even a 1 percent difference in investment returns can make a big difference in absolute terms.

So the fund's performance last year is reassuring, particularly given the size of assets under its management. Of course, the returns on any investment can be cyclical and subject to changes in global macro-economic conditions, and the fund's exposure to risk. Further, given that the CIC holds many illiquid assets whose returns cannot be accurately evaluated in the short term, it is not entirely impossible that some one-off items contributed to the fund's performance last year.

Nevertheless, many believe that CIC's improving performance may indicate that China's sovereign wealth fund has become more mature and that its early investment is gradually paying off.

Starting with a few controversial private-equity type investments in international financial institutions during the 2007-08 global financial crisis, CIC's investments have become more diversified in asset classes, geography, duration and exposure to risk.

One particularly notable trend in the past few years is that CIC has increased its exposure and investment in emerging markets, largely due to their stronger economic growth. Among all emerging markets, Africa seems to have become a focus of CIC investment.

There are probably several well-justified reasons for such a shift. First of all, as politics start to stabilize in Africa, the continent has shown a lot of potential for economic growth. Given that some African economies are less developed than China's, China may be able to provide them valuable capital, skills and even ideas on reform.

Strategically, China has always maintained very friendly relations with African countries, which are proving even more steady and valuable now that the Chinese economy is reaching a mature stage, and China's international presence and influence increases with its economic might.

Of course, CIC can provide capital that is critical for Africa to develop its economy. Because of its size, CIC can take on long-term investment, most notably in infrastructure development and mining exploration and development that may not be palatable to other investors who do not have CIC's liquidity and long-term ambitions.

Of course, apart from its investment returns, CIC's investment inevitably helps China gain better access to Africa's large and booming market. Because CIC can take on risks and investments that not too many other investors are willing to take, it can expect to be rewarded with relatively more attractive returns, financially and strategically.

There are a few important things CIC ought to note when considering future investment.

First and foremost, it should continue its focus on investment in areas related to infrastructure development and natural resources exploration. Africa is historically known for its rich natural resources. Unfortunately, the underdevelopment of infrastructure has held back the continent's economic potential. Ports, railways, airports and the modern highway system are extremely valuable assets that can boost Africa's economic growth.

With the necessary infrastructure in place, building key distribution hubs and distribution networks across the continent will also provide critical long-term investment. Based on the experience of other economies, the efficiency of a market's supply chain and logistics management can have considerable impact on a it's development.

Given African's vast territory and diverse ethnicity, building up a modern and efficient distribution channel may be especially valuable to African companies and consumers.

In addition to the strategic investments that CIC has natural advantages in, it should invest in commercial projects that can leverage Africa's younger population, increasing purchasing power and changing lifestyles.

With wealthier African consumers demanding more from life, Chinese companies have become major suppliers in Africa. How they can better serve the market and how they can work better with their African counterparts have become top priorities for them.

CIC, with its resources and experience in both markets, may have unparalleled advantages in making investments vital to both African and Chinese companies, and that are socially beneficial to African consumers.

If CIC can successfully bring capital, connection and consumers together in Africa's vast and growing market, it can not only make some very safe and sound investments, but also raise African consumer products, technology development and financial services to new heights.

The author is faculty fellow at the International Center for Finance, Yale University, and deputy director of the Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University

(China Daily Africa Weekly 09/27/2013 page9)