By Yantoultra Ngui and Rae Wee

SINGAPORE (Reuters) -State-backed investment banks China International Capital Corp and China Galaxy Securities plan to launch funds worth a total of more than $1 billion in Southeast Asia, seeking to grab a slice of a lucrative market amid a U.S. tariff war.

The move heralds a shift in investment focus for the banks, typically focused on the domestic market, and comes as Beijing encourages its financial champions to support outbound investment and deepen regional economic ties.

Units of CICC and China Galaxy expect to launch the investment funds over the next 1-1/2 years, a top executive and a person with knowledge of the matter told Reuters.

"As the tariff wars continue and Chinese corporates accelerate their 'China plus N' strategy, they seek local expertise in Southeast Asia," said Carol Fong, chief executive of CGS International, a unit of China Galaxy Securities.

Such regional knowledge will aid efforts to expand in areas such as supply chain and distribution, she added.

'China plus N' refers to Chinese companies' diversification strategy to expand supply chains and operations beyond their home country to mitigate geopolitical risk.

CGS is looking to launch next year a private equity fund of up to $1 billion that aims to facilitate investments and capital flows between China and Southeast Asia, Fong added.

The fund will target high-growth sectors such as healthcare, AI, advanced manufacturing, renewable energy and consumer, offering investors exposure to emerging opportunities across both China and Southeast Asia, she said.

The banks' push into Southeast Asia also underscores Beijing's efforts to boost regional ties since U.S. President Donald Trump unveiled hefty import tariffs in his global trade war that targeted China with even heavier levies.

China and the United States agreed in May to pause some tariffs, but the region of 11 countries with a population of more than half a billion is increasingly becoming a target for Chinese companies seeking growth overseas.

"Southeast Asia's huge market and growth potential presents a big opportunity for Chinese firms," Fong said.

LARGEST TRADING PARTNER

CICC Capital, the private equity investment arm of CICC, is partnering with government agency Malaysia Digital Economy Corp to set up a fund of size targeted at $100 million, an official of the country's digital ministry told Reuters.

It will invest in Malaysia's gaming industry, the official added.

Separately, CGS International is teaming up with Fullgoal Asset Management Hong Kong and Bursa Malaysia to ease the listing of foreign-underlying ETFs in Malaysia, particularly those offering China exposure.

The first such listings are expected within 12 to 18 months, pending regulatory clearance, Fong said.

China is Southeast Asia's largest trading partner, with annual two-way trade rising 12% to $982 billion in 2024, Chinese customs data shows.

Malaysia has secured 2.97 billion ringgit ($702 million) in confirmed investments from leading Chinese technology companies, Reuters reported on Wednesday, citing its digital ministry.

The funds will go to develop artificial intelligence capabilities and next-generation digital infrastructure, and create 6,800 high-value digital jobs, the ministry added.