China Investment Corp. is close to purchasing a 12.5% stake in some Canadian timber assets from an infrastructure affiliate of Brookfield Asset Management Inc. for about $100 million, according to people with direct knowledge of the matter.

The move, the latest effort by the Chinese sovereign-wealth fund to step up its investment in assets that could help shield its giant overseas portfolio from rising inflation risks, comes as Canada prepares to provide guidance for foreign investment by state-owned entities.

CIC, which manages a chunk of China’s massive foreign-exchange reserves, is expected to sign as soon as this week the deal with Brookfield Infrastructure Partners LP , which is partly owned and managed by Brookfield Asset Management, the people said. The Wall Street Journal reported in September that CIC was in talks with Brookfield about investing in timber and other types of infrastructure assets that could act as a hedge against inflation.

The timber assets are part of closely held Island Timberlands, which is jointly owned by Brookfield and other institutional investors and consists of about 634,000 acres of freehold timberlands mainly on Vancouver Island, the people said. Brookfield Infrastructure, which is publicly traded, told investors in July that it planned to divest some of its timber and other assets.

“In the current low interest-rate environment and given strong interest in infrastructure assets from institutional and strategic buyers, Brookfield Infrastructure believes that there could be opportunities to monetize these assets and reinvest capital in assets that offer superior returns,” the company said at the time, according to a document on its website.

CIC, the fifth-largest country fund in the world, has been shifting toward long-term, hard assets in foreign markets that can throw off steady cash flow. Like other investors, CIC is looking to protect its portfolio from rising inflation risks potentially posed by stimulus measures in Western countries. Last week, CIC said it will buy a 10% stake in the holding company that runs London’s Heathrow Airport. In January, it acquired 8.7% of Thames Watera closely held utility responsible for the public water supply in London.

CIC Chairman Lou Jiwei said in a June interview with The Wall Street Journal that the fund had allocated less than $10 billion of its $482 billion portfolio to infrastructure. Mr. Lou also said CIC would invest in infrastructure assets mainly as a financial investor, adding: “we do not have anybody who can really use shovels.”

The deal with Brookfield comes amid uncertainty over whether Ottawa would approve a much larger pending deal by the Chinese in Canada, the $15.1 billion agreement by China’s Cnooc Ltd. to acquire Nexen Inc., one of Canada’s largest independent energy producers. Even though the CIC-Brookfield deal likely won’t be subject to the kind of regulatory scrutiny experienced by the Cnooc deal, CIC and other Chinese companies operating in Canada are eager to see how Ottawa views the Cnooc deal and how it clarifies its approach to foreign investment by state-owned companies.

Source: Wall Street Journal Nov 2012

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