Can China’s US$941 billion wealth fund be the white knight to distressed stock, forex markets?

China’s sovereign wealth fund has expressed a desire to invest in the domestic market as stock valuations have hit multi-year lows, underscoring how coming home may bring it new opportunities to boost returns.

The US$941 billion China Investment Corp. (CIC) wants permission to invest in local shares and bonds, and has laid the groundwork for an application to the central government, people with knowledge of the matter said. While it remains unclear if top leaders will grant approval, the potential move by the Beijing-based investor would add an engine of growth to complement an overseas portfolio that posted record returns last year.

China’s equity and bond markets are under pressure from a trade war, a slowing economy and rising defaults, with the benchmark stock gauge slipping into a bear market last month. While mainland stocks have rebounded in the past week, they’re still the cheapest relative to a gauge of Chinese stocks traded offshore in almost four years. At a public forum last month, CIC’s head of asset allocation Fan Hua said she saw “very good opportunities” in Chinese shares and yuan-denominated bonds should the fund be allowed to invest.

Adding to the appeal of stocks listed in China is their inclusion by MSCI in global indexes in June. For CIC, whose mandate since its 2007 inception has been to invest the nation’s foreign-exchange reserves offshore, that restriction puts it at a disadvantage to global peers. It also creates potential complications because about two-thirds of its overseas portfolio is farmed out to external managers, some of which may be already investing in China shares after the MSCI move.

From an asset allocation perspective, Chinese shares can bring good expected returns amid solid corporate profits and low valuations, better chances for alpha thanks to the dominance of retail investors, and a market featuring “very low correlation’’ with others, Fan said at the June 29 forum. The valuations of domestic shares are “very attractive” after recent declines, Fan said, adding that many Chinese companies still enjoy robust profitability even as the economy slows.

The growing ranks of local hedge funds, many of which are delivering good returns, would also provide a “sizeable’’ pool of external managers to choose from, she said at the time.