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China Investment Corporation

China Investment Corporation (CIC)is a sovereign wealth fund responsible for managing part of China's foreign exchange reserves. It was established in 2007 with approximately US$200 billion of assets under management. In June 2013 a CIC official said total assets had grown to US$500 billion in 2012 from US$482 billion in 2011.

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New CIC sovereign fund boss faces greater challenges

Ding Xuedong, recently tapped to lead the mainland's sovereign wealth fund, will be under more scrutiny than his predecessor

PUBLISHED : Wednesday, 03 July, 2013, 12:00am
UPDATED : Wednesday, 03 July, 2013, 7:53am

The new boss of China Investment Corp, the mainland's US$480 billion sovereign wealth fund whose chairmanship had been vacant for about five months, faces two immediate challenges - making more money from the fund's overseas investments and finding additional capital.

The two challenges may have been reflected in the months of internal debate and jockeying for the chairmanship of one of the world's largest sovereign funds, even with some candidates reportedly hesitant to accept the post due to increased pressure to generate returns and a lack of financial support. Some industry watchers said the long interregnum could have diminished the importance of Beijing-headquartered CIC.

"The new chairman will definitely face much more pressure than Lou Jiwei," said a source close to CIC who declined to be named due to the sensitivity of the issue.

"For Lou, the founding chairman, his biggest achievement was setting up CIC, recruiting its management team and getting it to move forward for six years. People will remember him for that. But for Lou's successor, people will definitely focus more on the fund's performance."

Last week, Beijing picked Ding Xuedong, a deputy secretary general of the State Council, China's cabinet, to succeed Lou, who was promoted to finance minister this year in a move widely seen by the financial community as a reward for his six years at the helm of CIC. Before heading up CIC, Lou was a deputy finance minister for more than nine years.

The appointment of Ding, also a deputy finance minister before joining the cabinet office, is seen as a safe choice, with Beijing needing a good communicator to go back and forth between the central government and CIC's managers. But such an appointment - more political than business-focused - may have disappointed some international investors and dealt a blow to the independence and transparency of the fund, which CIC keenly maintained under Lou's leadership.

"One way of approaching a potential recruitment would be to analyse how a fund really works from a strictly professional perspective, like a potential investor," said Dag Detter, former president of the Sweden-owned asset management firm Stattum and now a fund industry consultant, specialising in sovereign funds. "How clearly can he demonstrate his achievements and be rewarded for them? How independent will he be in his investment decisions, hiring of professionals and so on?"

Michael McCormack, executive director at Z-Ben Advisors, a China-focused fund industry consultant, said external doubts about CIC's long-term development and its return on investments had increased.

"The new chairman's most important function is to get money out of SAFE," said McCormack, referring to the State Administration of Foreign Exchange, which manages Beijing's more than US$3 trillion in foreign reserves, the world's largest.

McCormack said the other challenge - increasing returns on CIC's investments abroad - would depend less on the chairman's individual power and more on Beijing, which might cause concern among Western countries. Some countries have complained that CIC is not transparent enough.

Iacob Koch-Weser and Owen Haacke, researchers who wrote a report about CIC for the US-China Economic and Security Review Commission last month, said that in the US "the question of how to treat incoming investment from China's sovereign investors remains unresolved".

"Some policymakers support lenient treatment to encourage foreign investment, while others worry about national security," they said. In March 2010, on the sidelines of the annual meeting of the National People's Congress in Beijing, Jesse Wang, then executive vice-president of CIC, told reporters the fund was "short of cash" and urged the government to inject capital.

CIC later received a symbolic US$30 billion injection from the government. In March 2011, Wang told The Wall Street Journal that CIC was seeking a "clear funding mechanism just like what other, more mature funds have". Wang retired last week.

Sources close to CIC said its cash position remained so weak that its fund managers felt it was difficult to make further billion-US-dollar-sized investments abroad. In its latest publicly available annual report, from 2011, CIC reported a loss of 4.3 per cent on its US$150 billion international investment portfolio - the worst performance since it was established in 2007.

In comparison, three-year total shareholder return (TSR) was 15 per cent, compounded annually, at Singapore's sovereign fund, Temasek, Temasek said in its 2012 business review. Temasek's 10-year TSR was 10 per cent and its 20-year TSR 15 per cent.

"Most of CIC's large, near-term gains are going to come from the Huijin side, for which the new chairman will get no credit," McCormack said, referring to Central Huijin Investments, a wholly owned unit of CIC established in late 2003 as part of the reform of the mainland banking industry. Huijin is now a major shareholder in more than a dozen top state-owned financial institutions, including the Big Four banks.

Additional reporting by Ray Chan

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