Ten years on, where to now for China’s sovereign wealth fund?

Launched to much fanfare, CIC has struggle to generate returns, retain top talent and shed suspicions about its role

PUBLISHED : Sunday, 27 August, 2017, 11:30am
UPDATED : Sunday, 27 August, 2017, 10:54pm

Gao Xiqing remembers the buzz around China’s US$200 billion sovereign wealth fund when it launched in 2007.

In an internal memo, Gao, China Investment Corporation’s (CIC) first president, said he was warmly welcomed by the investment community when he flew to the United States.

There was also a long queue of foreign fund managers keen to meet CIC’s management at its headquarters in Beijing’s New Poly Plaza. As the rest of the world was propelled towards financial crisis, CIC rode into town with a fresh cash infusion.

A decade later and much of the shine has come off the fund, with critics accusing it of poor investment decisions, overseas players wary of its links to the Chinese government and talent leaving for opportunities elsewhere.

The initial idea behind the fund was to boost the returns of China’s then mounting foreign exchange reserves. Under the State Administration of Foreign Exchange’s stewardship, the reserves had been invested conservatively, with critics saying it put too much emphasis on low-yield US Treasuries.

To plot a new financial course, CIC embarked on a high-profile recruitment campaign in major global financial centres, luring many experienced Chinese specialists from Western investment banks and hiring dozens of non-Chinese professionals.

Expertise was crucial if the fund was to meet its huge financing obligations.

Lou Jiwei, CIC’s chairman for its first five years, admitted to feeling huge pressure in steering the fund, saying in 2007 that when he woke up every morning, CIC had to another 300 million yuan in interest.

Among CIC’s early splashy investment deals, was a 10 per cent stake in financial services firm Morgan Stanley and holdings in asset management group Blackstone.

But it was an inauspicious start – more than half of the assets’ book value was wiped off in the 2008 market meltdown although it later bounced back as the market recovered.

The sovereign fund then took to the energy and resources sectors, opening a Toronto office in 2011 to oversee its huge investment in Canada, including Teck Resources.

A downcycle in the commodities market again ate into the bottom line so the fund once again shifted focus to direct investment, launching an offshoot in January 2015 and opening a New York office in May.

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The results have been less than impressive. From a 4.3 per cent loss in 2011 to 10.6 per cent gain in 2012, CIC’s annualised return of 4.76 per cent was slightly higher than the 4.3 per cent coupon of the 10-year special bond issued by the Ministry of Finance to raise the initial US$200 billion.

The explosive growth of domestic financial assets helped lift the fund’s value to US$813.5 billion today but it has been held back by its performance overseas.

Part of the problem has been foreign scepticism of CIC’s true role.

Outwardly the fund projects itself as a long-term financial investor seeking to maximise profits, with a firewall between its overseas operations and domestic subsidiary Central Huijin Investment, which controls large stakes in China’s big four state-owned banks, major insurers and brokerages.

But “some of the fund’s decisions are politicised” given the presence of officials in its senior management ranks according to the US-China Economic and Security Review Commission. Its engagement in strategic sectors, coordination with state firms and economic diplomacy also suggest that its motives are “not strictly commercial”.

“Fairly or unfairly, CIC, being a state-backed investment fund from a communist country, will always be looked upon with suspicion by other governments,” said Friedrich Wu, an adjunct associate professor at Nanyang Technological University in Singapore.

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Those suspicions came to the surface in November 2009 when CIC announced the acquisition of 15 per cent of AES Corporation, a US-based power generation and distribution firm. The deal eventually went through but only after a four-month investigation by the Committee on Foreign Investment in the United States into its possible national security implications. That process fuelled concern about higher transaction costs and even failure for similar deals.

Wu has examined dozens of CIC deals and said the lack of a clear definition of national security in the US resulted in broad scope for legal interpretation. At the same time, the negative view of China and its improving economy increased the possibility that the flexible legislation could be exploited to obstruct Chinese investors, he said.

Brad Setser, a senior fellow at the Council on Foreign Relations in New York, said the fund was an unusual hybrid reflecting China’s institutional and political structure.

“It is mostly a bank holding company, it has a small liquid portfolio of stocks and bonds which looks a bit like the standard portfolio of a traditional sovereign wealth fund,” Setser said.

“And it has made various politically and strategically driven investments to support various initiatives of the Chinese government – going out, the drive to buy resource rights and resource producing assets, now the Belt and Road.”

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CIC now has the bulk of its portfolio invested in public equities and bonds, with little to distinguish it from the plethora of other funds such as the Silk Road Fund and the China-Africa Development Fund, that are vying for a bigger bite of the country’s shrinking forex reserves.

“We have already been cold-shouldered [by the Chinese government] for several years,” a CIC staff member said.

Despite taking big stakes in projects such as the Port of Melbourne in Australia and the gas division of British National Grid, CIC was finding it hard to compete for projects in the politically sensitive United States, the staff member said.

Also, with the resignation of many of the investment professionals hired from New York, London and Hong Kong, the fund was increasingly operating like another Chinese state-owned enterprise instead of a Wall Street fund, the source said.

In addition, CIC has been without a chairman for half a year since Ding Xuedong moved on to become deputy secretary general of the State Council. Ding took on the top fund job four years earlier after it had been vacant for four months.

That has all added up to lacklustre returns, according to Jean-Marc Blanchard, executive director of the Mr & Mrs SH Wong Centre for the Study of Multinational Corporations.

“The return was so mediocre and [there is] no pressure for it to do better … It largely focused on sustainable things domestically, rather than becoming a major international financial player,” he said.

Blanchard said investment safety was now a top priority with the vast majority of its portfolio allocated to “pretty boring” developed world stocks and bonds.

“They are much cautious than they need to be … [as to] protect themselves from possible fallout from making bad investments,” he said.

CIC did not immediately respond to a request for comment.