CIC, French utility giant strike energy deal

China Investment Corporation (CIC), the nation's sovereign wealth fund that manages part of the nation's foreign exchange reserves, is paying nearly 3 billion euros to GDF Suez for a minority stake in the French utility's energy exploration and production business.

The proposed deal is broken into two parts. CIC will own 30 percent of GDF Suez's exploration and production division by investing 2.3 billion euros.

As part of the deal, CIC will also pay 600 million euros to acquire 10 percent in an Atlantic LNG liquefaction plant that is located in Trinidad and Tobago, according to a joint Memorandum of Understanding signed on Aug 10.

Both CIC and GDF Suez expand tremendously through the deal. CIC will help expand the French utility's presence in the Asia Pacific by co-financing its projects while CIC will help GDF Suez build its operations in China, according to The Wall Street Journal.

GDF Suez CEO Gerard Mestrallet said the company aims to boost its electricity production business in the Asia Pacific region by 5 percent in the next two years.

Lou Jiwei, chairman and CEO of CIC, called the 30-percent acquisition its first sizeable transaction in Europe.

"We are committed to working with GDF SUEZ E&P to achieve its growth prospects," Lou said.

The deal would allow GDF Suez to expand its footprint in the energy-hungry Asia-Pacific while pursuing its strategy to reduce its debt of nearly 40 billion euros.

GDF Suez's board has given the green light for the alliance.

The proposed deal allows China to diversity its foreign reserve assets and offset risks from China's huge foreign reserves, according to analysts and economists.

China's foreign reserves, or forex, are now nearly 30 percent of the world's total at a record high of $3.2 trillion (2.23 trillion euros) as of June.

The country is by far the largest foreign holder of US debt, with holdings of $1.16 trillion in May. It is estimated that 70 percent of China's $3.2 trillion foreign reserves are dollar assets.

This dollar-dominated portfolio has, coupled with the 13-percent depreciation in the dollar since the start of the global financial crisis, directly resulted in the dwindling of the dollar-denominated foreign reserves held by emerging economies, such as China, says Zhang Monan, an economics researcher with the State Information Center.

Chinese officials and economists expressed concern about further uncertainty in the US economy despite the US' recent move to increase its debt ceiling earlier this month in an aim to avoid a default.

Chinese rating agency Dagong Global Credit Rating Co responded to cap increase by downgrading its rating of US sovereign credit. More experts are calling for investors such as CIC to turn part of China's forex into investments to offset the effects from the US' flagging economy.

"China should further expand the scale of its sovereign wealth funds and strive to switch from financial investments to industrial investments in a bid to accelerate its overseas mergers and the acquisition of overseas resources," she said.

Victoria Barbary, senior analyst with Monitor Group, says the deal is very much in line with CIC's strategy into the commodities and energy sector.

"CIC has invested in other industrial companies such as AES over the past two years, so an investment in GDF makes sense as part of its strategy - building a diversified portfolio that gives the fund exposure over a wide range of markets and sectors," says Barbary, who added that CIC will continue to seek investments in the near future.

Dong Xian'an, chief macroeconomic analyst with Industrial Securities, says that CIC's purchase of stakes in GDF Suez's exploration business will help energy-hungry China as it develops its economy.

But Dong says, "CIC is still a small company with limited investment talents, compared with the huge amount of money it manages. The more actions the company takes, the more risks it will have".

CIC ranks the fifth among all sovereign wealth funds in the world by asset value, statistics from the US-based Sovereign Wealth Fund Institute show.

CIC reported a net profit of $51.5 billion in 2010, with a net asset value of $374 billion. The annual return rate of its global portfolio reached 11.7 percent, and the accumulated annual return rate since establishment stands at 6.4 percent.

North America is still the largest destination for CIC's investment, accounting for 41.9 percent of the fund's portfolio, followed by the Asia-Pacific region at 29.8 percent and Europe at 21.7 percent.

CIC holds a significant part of its overall investments in finance (17 percent), energy (13 percent) and materials (12 percent).