The opening of the US$200 billion China Investment Corp has sent tremors of unease around the financial world. But although the CIC is likely to grow one day into an international investment giant, in its early days the new fund will tread extremely carefully in global markets.
That is partly because international investing can be a lot harder than it sounds. The CIC was set up to maximise returns on a portion of the mainland's huge US$1.4 trillion pool of foreign exchange reserves, most of which is parked in low-yielding US Treasuries and agency debt.
But maximising returns means running a greater risk of losing money, as the CIC managers have already learned to their cost.
The fund's first high-profile allocation, a US$3 billion pre-listing investment in US private equity company Blackstone, has fallen in value by 17 per cent in the past four months. That amounts to a US$500 million loss before the fund has even begun official operations.
The Blackstone investment has attracted plenty of criticism from within the mainland, but the prospect of causing international controversy is likely to worry the CIC's bosses just as much. Former finance vice-minister Lou Jiwei and his colleagues on the CIC's executive board will have to take enormous pains if they are to shake off international suspicions that the fund's real objective is not to maximise investment returns but rather to flex the country's financial muscles in support of Beijing's political aims.
Allaying international concerns will not be easy. The fund's sheer size and Beijing's obsessive secrecy have inevitably fuelled fears around the world about the mainland's true intentions. Last week, Joaquin Almunia, the European Union's commissioner for economic and monetary affairs, warned that Brussels would impose investment restrictions on sovereign wealth funds unless they met European standards of transparency.
In the United States, commentators have warned that the new fund and others like it risk becoming a dangerous source of instability in global financial markets.
Beijing seems to be paying heed. Recently, it has emerged that much of the CIC's funds will not be invested actively abroad but will rather be allocated domestically. An estimated US$67 billion will be used to acquire the assets of the People's Bank of China-controlled Central Huijin Investment, which owns substantial stakes in three of the country's four big state-owned banks.
It is likely a further US$40 billion has been earmarked for recapitalising the ailing Agricultural Bank of China, while US$20 billion may be injected into China Development Bank.
That will leave a little more than US$70 billion for international investment - a sizeable amount but relatively small compared with existing sovereign wealth funds.
Even so, plenty of attention will be focused on how the funds are allocated. The early signs are that the CIC will be relatively modest in its ambitions. For example, mainland officials have assured European governments that the fund will not be used as a vehicle to grab control of major European companies.
Initially at least, the CIC is likely to limit its developed-market acquisitions to passive minority stakes in other people's deals. Even that could cause problems, however. The news last week that Huawei Technologies has taken a 20 per cent stake in US firm 3Com in a takeover deal led by private equity company Bain Capital prompted a flurry of complaints in Washington about threats to national security.
Another way in which the CIC could try to alleviate suspicions is by investing through intermediaries. International asset management houses are queuing up in the hope of winning mandates. Meanwhile, the governments of countries such as Barbados, which boasts an extensive network of bilateral investment treaties complete with established dispute arbitration mechanisms, are eagerly offering their services as middlemen.
In the near term, the CIC's investments are likely to be aimed principally at funding the country's acquisition of natural resource supplies and supporting the expansion plans of state companies in Asia, Africa and Latin America.
But given the heavyweight make-up of the CIC's executive board, which includes a representative from the National Development and Reform Commission, the rest of the world is unlikely to easily overcome its suspicions that the fund's goals are mainly political rather than commercial, no matter how much Mr Lou and his colleagues try to avoid making waves.