From the start, Beijing's decision to invest its huge foreign reserves has stirred controversy at home and abroad, with global financial markets closely looking for any hint of how Chinese policymakers would decide in managing its US$1.33 trillion stockpile.
From the time news of setting up the state investment firm, China Investment Corp, first broke, the country's leaders have been compelled to reassure the world that Beijing's move to diversify its foreign investments will not hurt the global market.
At home, a more recent plan approved by the top legislature for the Ministry of Finance to launch 1.55 trillion yuan of tradable special treasury bonds to fund an initiative to buy US$200 billion of the reserves at one point caused jitters in the mainland stock market, depressing share prices amid fears the huge amount would soak up liquidity in the market.
Granted, the finance ministry said last week it would issue an initial 600 billion yuan of bonds this week to the Agricultural Bank of China, which will transfer them immediately to the People's Bank of China. The central bank will then sell an equivalent amount of foreign assets to the CIC.
A sale like this could have spared the stock market further instability as the bonds - equal to more than 7 per cent of the country's 21 trillion yuan GDP last year - would have taken longer if sold to the public.
Still, it also pits the ministry against the central bank, especially in its key role of regulating the monetary markets. There have been heated internal debates about each institution's function and, inevitably, about the vested interests among the finance ministry, the PBC and the State Administration of Foreign Exchange.
An investment banker advising the CIC said last month's spike in broad monetary supply, M2, stemmed from the PBC sterilising less money than usual on the expectation the special bonds would have provided that effect. The banker said the M2 rose due to the delay in the special bond issue following the power struggle between the PBC and the finance ministry over the investment agency.
Though the CIC is independent, the wrangling between the central bank and the ministry could continue as the two most powerful agencies on state monetary affairs try to exert influence on the firm.
As far as the CIC's spending power goes, it is far less than US$200 billion. Sources said the US$200 billion figure was expected to cover US$60 billion of investments that Central Huijin Investment has already made in mainland banks and brokerages. Central Huijin also plans to inject as much as US$70 billion into China Development Bank and Agricultural Bank of China. After accounting for these investments, the CIC will have about US$50 billion to invest.
Yet, this would contradict the firm's purpose of easing pressure over the fast-rising foreign reserves by diverting investment overseas as the firm would hold most of its assets in yuan.
It also contradicts Beijing's other intended goal - to jump-start the investment company as a major channel for recycling the country's fast-rising reserves. This is the chief source of international concern, with critics blaming Beijing for creating global imbalances.
The country's foreign reserves have been rising fast in recent years. In the first half of this year, they grew US$266.3 billion, US$144 billion more than a year ago and greater than the full-year increase of US$247.3 billion last year. The most severe challenge for the CIC is how it will achieve the goals of policymakers.
Finance Minister Jin Renqing said last month the CIC would target returns exceeding those from long-term special bonds. With the yuan appreciating against the US dollar at about 5 per cent annually and the central bank paying more than 3 per cent annual rate to the special bond investors and shouldering the costs of running the agency, even a 10 per cent return for CIC would only mean a breakeven. The Government of Singapore Investment Corp (GIC) achieved an average annual return of 8.2 per cent for the 25 years to 2006. The Greenwich investable hedge fund index has returned an acceptable annualised 8.8 per cent over the last three years. Beijing's target is a stiffer one in yuan terms as the yuan is rising fast amid global political pressure.
Jing Ulrich, chairman of JP Morgan Securities' China Equities, said the CIC's highly publicised investment in US private equity firm Blackstone Group suggested Beijing was intent on seeking out high-return investments.
However, the CIC's first investment venture has ignited unusual public backlash at home with some bloggers and postings in internet chat rooms bitterly questioning Beijing's judgment. Foreign investment is a tricky issue for the government because of the public's virulent nationalism, ironically partly due to government indoctrination.
Analysts also warned that the challenge could be particularly acute as the liquidity-fuelled boom in the global capital markets in recent years was showing real signs of strain. Most developed markets have been struggling against the meltdown set off by the US subprime crisis.
Stephen Green, a senior economist at Standard Chartered Bank in Shanghai, warns keeping a mindset for higher returns will turn the CIC into a hedge fund.
'Running foreign reserves is not like running a fund,' Mr Green said.
Another severe challenge is the lack of professional talent to manage the firm, especially as Beijing would be politically reluctant to hire global fund managers to run the sovereign wealth.
'Most Chinese financial officials are home-trained experts on public finance and fiscal policy, not fund managers,' said Lu Hongjun, president of the Shanghai Institute of International Finance. He said this was in contrast to the GIC, where most staff have globally recognised qualifications such as chartered financial analysts and certified financial planners.
To ease the talent shortage, the CIC has started tapping financial expertise from government institutions. Lou Jiwei, a former vice-minister of finance and now deputy secretary-general of the State Council, will lead the agency. Other core team members include Gao Xiqing, deputy chairman of the National Social Security Fund; Zhang Hongli, a vice-minister of finance and a rising star; and Central Huijin's deputy chairman Jesse Wang Jianxi and managing director Xie Ping.
Analysts also warned of a possible backlash from countries targeted for investment. They worry a massive investment would trigger tumbles in global markets, hampering diplomatic ties, as China's recent aggressive investment in resource-rich Africa has shown.
'The investment firm is so huge it will move markets, blowing up well-thought-out trades at the touch of a bureaucrat's button,' Mr Green said.
'Massive investments by China, especially in smaller countries, may trigger nationalistic sentiment in the targeted countries and cause problems when the investments are executed,' said Dong Tao, chief economist with Credit Suisse.
The launch of the Chinese agency coincides with an intensifying global debate about the role of sovereign investment bodies and their emerging clout in the financial markets. The US and other European governments recently called on the International Monetary Fund and the World Bank to draw up guidelines for sovereign wealth fund practices. Calls for transparency and accountability of sovereign wealth funds are growing.
Analysts believe the investment climate will become tougher for the CIC due to rising protectionism in the US and Europe against state-owned funds.