Wealth fund arm may be restructured

PUBLISHED : Friday, 02 September, 2011, 12:00am
UPDATED : Friday, 02 September, 2011, 12:00am


Beijing is mulling whether to spin off the domestic arm of the nation's sovereign wealth fund and inject an additional US$100 billion of capital into a new entity that focuses on overseas investments.

The proposal is the latest twist in a long-heralded plan to boost the capital base of China Investment Corp, which has only about US$5 billion of idle cash for new investments.

According to people close to the US$300 billion sovereign fund, the proposal to restructure the CIC has been submitted to the State Council, but it remains unclear whether the cabinet will endorse the plan.

China set up the CIC in 2007 with an initial investment of US$200 billion. However, the actual amount that could be invested abroad was valued at about US$110 billion. That was because Central Huijin Investment, which is part of CIC, held stakes in the country's major banks and had taken up US$90 billion in capital.

The assets of the mammoth sovereign wealth fund have grown in the past years, buoyed mainly by dividend payouts from profitable Chinese banks.

The plan to spin off Central Huijin and create a foreign-investment-only entity, or CIC International, could enhance the transparency of the sovereign fund, which has been criticised for its opaque operations and lack of investment acumen.

The CIC wasn't available for comment yesterday.

One source said the fund was reluctant to spin off Central Huijin because the domestic investment arm helps shore up CIC's books.

Mainland banks, which enjoy high net interest margins due to central bank policy, have made good profits in past years largely due to the country's rapid economic growth.

'There is a division between the CIC and other financial authorities in discussing the separation,' said one person with knowledge of the matter. 'The power battle could further delay the injection of fresh funds.'

The idea of putting fresh capital into CIC surfaced at the beginning of last year when Peng Junming, an official with the sovereign fund's asset allocation and strategic research department, told a forum that it would probably receive an additional US$200 billion in cash from the foreign exchange reserve.

The CIC took an aggressive approach in foreign markets last year, paying out US$58 billion to directly buy stocks and equities of unlisted companies as well as to invest in private equity and mutual funds.

Early this month, the CIC said in its annual report for last year that it had achieved an 11.7 per cent return on its overseas investments.

But Zhou Dunren, an economist and professor at Fudan University, said he was not impressed with that figure or with CIC's investment track record.

'China can't afford to waste time in chasing relatively cheap assets during the global economic slowdown,' he said.

'And the belief that the United States and other Western countries have put stumbling blocks in the way of China's acquisitions is groundless. Beijing is in desperate need of a truly professional capital investment team.'

China has the world's largest reserves of foreign exchange - standing at US$3.19 trillion at the end of June.

It is not unusual for Beijing to delay, or even do an about-face, on major policies related to the financial sector, which have damaged the credibility of policymakers.

'There has already been a long wait for CIC to get a capital injection, and the jockeying among ministry-level authorities will continue for a while,' said Howhow Zhang, research head with fund consultancy Z-Ben Advisors.

In China, the CIC is a ministry-level entity, on par with other powerful agencies, including the People's Bank of China and the Ministry of Finance.

The central bank oversees the mainland's foreign-exchange reserves and the finance ministry is currently the 'owner' of the sovereign fund.