More on sovereign wealth funds
Few institutions are as intensely scrutinized, debated over and even feared as China’s recently minted sovereign wealth fund.
The China Investment Corporation (CIC), launched in summer 2007 to much fanfare, is barely out of swaddling clothes, yet already it has been picked to death by the international press, global wealth managers and a broad range of paranoid governmental institutions.
This is strange, as even a glance inside the ramshackle internal structure of the $200 billion, Beijing-controlled fund, the first of its kind ever launched by the People’s Republic, dispels much of the fear. Even the top mandarins running CIC admit that they are still fumbling around in the dark, and will be for some time.
"We’re still learning the ropes here," a board member and senior manager at CIC told Euromoney on the sidelines of the fund’s first annual general meeting, held at a plush central Beijing hotel on a chilly day last December. He says it will be "a few years yet" before the fund’s senior managers really know what they’re doing.
Vexation
Already the fund’s managers seem vexed by the level of attention they have attracted. The French, German and Australian governments have recently slammed the opacity of sovereign wealth funds, and US presidential candidate Hillary Clinton has signalled her intention to have them formally regulated by the World Bank and the IMF.
This irks senior officials at CIC, whose ranks are stuffed with high-ranking Communist officials, notably Lou Jiwei, a former deputy finance minister and now chairman of the fund’s board of directors. Another senior director at the fund is Hu Xiaolian, head of the country’s State Administration of Foreign Exchange, the body responsible for investing China’s near-$1.5 trillion foreign currency reserves.
"People should understand that this is the first time China has attempted something like this," contends the CIC official. "We see people purposefully picking faults with us – trying to make political points. Look at political leaders and their statements, such as ‘tomorrow when we wake up [German conglomerate] Siemens will have been taken over by CIC".
His unstated implication is that this is a ridiculous notion – yet at some point the fund’s managers will need to start investing all of that money. Investing widely and wisely is one of the biggest challenges facing the fund. It needs to provide a generous annual rate of return, probably 10%-plus, just to beat inflation and pay off its enormous debt obligations. "The chairman of CIC has told us that every day we open our eyes we have to make Rmb300 million ($41 million) just to meet [the fund’s] debt obligation," groans the senior official.
What of the fund’s investment targets – the source of much of the prevailing suspicion and paranoia? The official declines to comment on the widespread belief that CIC will take stakes of 5% to 10% in about 50 large global corporations, probably spread worldwide. That assumed wisdom appeared rooted in reality in late December, when the fund bought a near-10% stake in troubled US investment bank Morgan Stanley for $5 billion.
The official also noted the negative turn the markets had already taken in December, since when global markets have sunk further. "We may need to be more aggressive [in making decisions]," he said. "If the equity markets are falling and fixed income is rising and is more stable, we may need to invest more in fixed income. Our first priority is to make money. All our duty is to the country."
Generous discounts
Then again, the market mayhem provides the chance to grab significant chunks of leading listed global corporations at a generous discount, at least to recent price levels. That thinking was certainly at the forefront of the fund’s decision to buy into Morgan Stanley, which was a bold and brassy move for a fledgling operation.
The Chinese fund would also continue to focus solely on foreign investments, the official noted, batting down suggestions that it had considered investing in mainland-based businesses. "We are going to put more investment into international markets, mostly developed and emerging markets," he said. "None is going to be invested into China – and suggestions that this was going to happen is due to bad local reporting."