Lou Jiwei, China’s finance minister since March 2013, was named chairman of the National Social Security Fund, China’s largest pension fund, on 24 November.
The appointment comes at an interesting time – NSSF said it is planning to boost its current 24 percent exposure to alternatives. Last year China’s State Council allowed NSSF to invest in riskier assets such as private equity and domestic equities. This year the government started expanding NSSF’s asset base, allowing local governments to entrust and transfer their assets to the pension fund, which already managed 1.8 trillion yuan ($260 billion; €245 billion) as of April 2016.
Private Equity International attempts to find out more about the individual who’s taken over NSSF and what his appointment means for the industry.
Q. Who is Lou Jiwei?
Sixty-five-year-old Lou Jiwei was three years at the helm of China’s Ministry of Finance. Although he was removed from the post two years before his term ended, during his stint at the ministry he focused on the high levels of local government debt and oversaw the restructuring of their finances. He replaced China’s business tax with value-added tax and pushed for public-private partnerships in infrastructure projects.
In a speech at Tsinghua University last year he warned that China faced a “50 percent chance of sliding into the middle-income trap in the next five to 10 years” – a concept put forward by the World Bank where growth and incomes slow in many middle-income economies – unless it pursues further financial reform. In April this year, Lou also criticised US president-elect Donald Trump in a Wall Street Journal interview, calling him “an irrational type” following Trump’s proposal to increase tariffs on imported Chinese goods to up to 45 percent.
In 2007, Lou became the first chairman and chief executive officer of China’s more than $800 billion sovereign wealth fund China Investment Corporation. A Communist Party veteran, Lou was a protégé of reformist prime minister Zhu Rongji and in the 1990s helped craft the fiscal framework that brought about China’s two decades of 10 percent average growth. He also previously served as vice governor of Guizhou province and deputy secretary-general of the State Council, China’s central government.
Lou was ranked 39th in Forbes List’s most powerful people in 2012 and was deemed by Time magazine in 2008 as one of the 100 most influential people in the world.
Q. Is he a fan of private equity?
His track record at CIC suggests he certainly is. Lou held the top post at China’s first sovereign wealth fund when it was established in September 2007 until 2013. He oversaw the fund as it gradually built its infrastructure, capabilities and investment activities. Even in the tough global economic environment of 2008, CIC posted overall returns of 6.8 percent, according to its 2008 annual report. The fund bought stakes in US financial companies Morgan Stanley and Blackstone, and made its first private equity investment in 2008, committing an eye-catching $4 billion to a buyout fund managed by JC Flowers & Company, according to PEI data.
CIC more than tripled its investments in alternatives, from 6 percent in 2009 to 21 percent in 2010, whereby approximately $35.7 billion of new investments were made in the same year. In the subsequent years of Lou’s leadership, CIC set up a multi-billion-dollar fund with BlackRock to help Chinese companies acquire targets overseas. It also backed growth-focused private equity shop WestSummit Capital’s $300 million debut fund, which specialises in cross-border investments, and has acquired majority stakes in a number of US tech firms, according to PEI data. Among large Asian institutions, CIC was ahead of the curve in backing early stage tech companies in both China and the US, according to a China-based placement agent.
When Lou left CIC in March 2013, the fund had opened its overseas investment subsidiary CIC International, set up a representative office in Toronto, established the $2 billion Russia-China Investment Fund with the Russia Direct Investment Fund, and picked up stakes in Heathrow Airport Holdings and the Moscow Exchange.
Q. Does his appointment mean he will do more for private equity?
We don’t know for sure, but industry sources say it will be difficult for a veteran reformer and accomplished individual like Lou to implement changes at the NSSF in the short term.
“China has become less focused on reform and more and more inward-looking and nationalistic in its policies,” a Hong Kong-based managing director of a pan-Asian fund commented. “He probably won’t be able to do all the things he wants and would have to toe the party line.”
In terms of changes, Lou could improve the administration of NSSF in the next six to nine months, as well as open up NSSF to invest in overseas fund managers, suggests the MD.
As of April 2016 close to a quarter of the fund’s overall portfolio was allocated to alternatives, with fund commitments in recent years made to CITIC Capital, Fosun Capital Group, Legend Capital and SAIF Partners, according to PEI data.
“Lou is a very good man for China, but I am not sure he will be allowed to implement changes in the long-term,” the MD commented. “Investing overseas will be a good thing for NSSF, but the Chinese government may not even allow him that, because it means more capital leaving China. And now, it’s all about controlling the capital outflows.”