From News, page 3, issue no. 344, December 3rd, 2007
Translated by Zuo Maohong
Original article: [Chinese]

China Investment Corporation (CIC), the newly-formed fund charged with better managing China's massive foreign exchange reserves, has remained in obscurity since its birth in late September. Why was it established? What will its investment strategy be? What is its exact relationship with the central exchange reserves? What is the biggest problem it’s facing?

All of these questions were finally answered by Lou Jiwei, CIC’s board chairman, at a finance and sustainable development conference held on November 29th.

Registered Capital: 20 Billion Ideal

Judging form its current capability in both operation and human resources, Lou claims, “the fund would prefer a lower level of initial capital, say, 20 billion dollars, rather than 200 billion, and let its capital grow gradually as time passes”.

There have been controversies ever since the planning period, says Lou. One ies in its special financing pattern-- until now, the CIC has been the first independent fund totally supported by bonds issued by the Ministry of Finance. This setup, to some extent, indicates that the fund wasn’t established for mere commercial reasons.

“For the government, the fund is there to manage aggregate demand.” says Lou. “Since 2006, the central bank began a new round of controls to prevent overheating, at the same time, finding a way to deal with excess liquidity became increasingly important to policymakers.

As a result, the government has been making every effort to prevent overheating in investment and reduce liquidity since last year. But monetary policies have proven ineffective.

“To develop a system to help the central bank reduce liquidity by the government’s issuing bonds to the market” then became an option. By this system, the country’s huge foreign exchange reserve would be replaced by yuan-valued treasury bonds.

The initial proposal did not call for establishing an independent body. instead, the State Administration of Foreign Exchange was supposed to be in charge of the bonds. However, further discussions reached a consensus that “an institution specially geared to increase yields of foreign exchange assets within controllable risks should be founded.”

Lou, the former deputy minister of Ministry of Finance, then became the board chairman of the fund.

First Get Rolling

With all initial capital financed by treasury bonds, CIC has been facing high cost since the very beginning of its operation. “We are under great pressure at the moment. Let’s suppose a 5 percent yearly interest for special treasury bonds. This means every morning, from the moment I open my eyes, I need to make 300,000,000 yuan.” says Lou.

And the figure will be bigger if an accurate operation cost and the accelerating exchange rate are both counted. At present, China’s exchange yuan is appreciating at 6 percent on average every year.

Lou says the fund will mainly be operated by other institutions before enough qualified personnel are recruited, and will gradually operate on its own as its team matures.

He also notes that due to its pressure in interest payment, the fund will most probably focus on fluid assets rather than infrastructure; and, to drain liquidity, portfolios of international financial products will be preferred in non-yuan areas.

In the spirit of stable development, the fund will adopt a principle of “mainly open market investment and less alternative investment”.

The fund pursues, according to Lou, rational and stable yields in the long run within acceptable risks as well as maturity in corporate governance.

Add Flexibility to Assets

Formerly the central bank’s investment arm and now a wholly owned subsidiary of CIC, the Central Huijin has shared some of the fund’s pressure in asset allocation and thus brought more flexibility to the fund, says Lou.

The main responsibility of Central Huijin, according to Lou，is to contribute capital to major banking institutions as has been authorized by the State Council, and focus more on improving the company's value without direct intrusion in their operation.

Lou says that without this, the CIC could have only invested in bonds, adding that the fund “won’t give up any opportunity of direct investment”.

As for the subsidiary company’s future, Lou notes that its profits will be wholly dominated by CIC, but its operating assets will not be integrated.

Injection to Financial Institutions a Possibility

Although operated in commercial patterns, the fund bears certain social responsibilities at the same time, and therefore need establish what Lou identifies as a positive public image. In Lou’s words, what the fund strives for is “reasonable returns but not sheer economic interests”.

More importantly, the fund will work “as a platform for stabilizing the market”. Many independent wealth funds fulfilled this function when they injected capital to major domestic financial institutions affected by the US subprime mortgage crisis, Lou explains, adding that this is not meant for public welfare, but for long-term investment.

From this, it seems reasonable to infer that the CIC will work together with the central bank and share its responsibility of supporting stability in the financial markets in the future.

Unlike the Central Huijin, Lou says, CIC will try to be more transparent in operation under the condition that commercial interests are not influenced.

Talent Bottleneck: Team, not Stars, Wanted

Presently the fund is preoccupied with establishing a solid corporate governance structure, including well-developed auditing and supervising systems for both boards of directors and supervisors, an international counseling committee, a decision-making committee, a risk-evaluation committee, and others to be made up of experienced investors.

But Lou admits that it takes time to establish such a talent system. The fund is now recruiting staff on a global scale, meanwhile searching for suitable Chinese candidates via headhunters.

As for the criteria for selecting candidates, Lou stresses, “We don’t want stars. What we appreciate is teamwork.”

According to publicized plans, the 1.55 trillion yuan that Ministry of Finance has previously injected into CIC will be available before the end of the year. And the CIC now is in an increasingly urgent need to invest abroad. But Lou affirms that large investments won’t be possible until a mature talent team is developed.

All evidence seems to indicate that human resources are the biggest problem CIC is facing at the moment.