China Investment Corporation’s First Subsidiary Appears in Hong Kong

By Hu Jie and Ouyang Xiaohong
Published: 2010-11-10

Issue 493, November 8
Translated by Guo Wei
Original article:

A source close to China Investment Corporation’s (CIC) first overseas investment subsidiary—China Investment International (Hong Kong) Co., Ltd. (hereinafter referred to as CIC International)—said that the subsidiary formally started business operations on Monday. It has been two months since the branch registered in Hong Kong on September 10. During September, CIC also celebrated the third anniversary of its founding.

"In accordance with CIC’s previously established investment development strategy, when the conditions are ripe in a globally important banking center, the company will establish a subsidiary. Thus, Hong Kong naturally became the first choice.” The source mentioned above added that the idea of establishing a branch in Hong Kong began to be considered as early as two years ago.

Liu Zunyi Takes the Post of Chairman of the Board

In recent months, the reception desk on the 27th floor of Hong Kong’s CITIC building has displayed an eye-catching red banner that reads, “This is the office of CITIC group's CITIC Capital Holdings, Ltd. (CITIC Capital)”. However, according to the Hong Kong Companies Registry Information System, the location will also become CIC International’s business premises.

Liu Zunyi, who stepped down from his post as president of the Chinese University of Hong Kong in July and joined CITIC capital shortly after as deputy chairman of the board, will again change positions, taking up the post of chairman of the board for CIC International. Liu Zunyi’s secretary recently confirmed the news to our newspaper. According to the Hong Kong Companies Registry Information System, CIC International’s registered capital is 100 thousand USD. Its other two board members are Fan Gongsheng, CIC director of special investments, and Wang Shuilin, director of public and foreign affairs.

Before this July, Liu was a member of CIC’s Consultation Committee, which provided advice on growth strategies, investment strategies, and decision-making strategies.

Material also shows that CITIC Capital is CIC International’s legal secretary. According to Hong Kong's current legislation, corporations in Hong Kong must appoint a local company or a Hong Kong citizen to serve as the company’s secretary, thus acting as a legal guarantee.

This investment management consulting company’s business scope includes: direct investments, real estate funds, structural financing and asset management. It has more than 3 billion USD in managing money and more than 90 specialized staff. In August of last year, CIC, by means of ramping up purchases of stocks, came to own a 40 percent stake in CITIC. Following these three months, Liu Zunyi was appointed as board member of CIC’s non-executive board.

The Necessity of Promoting Investment Independence

Will CIC International and CITIC Capital simply coexist, or will the two become one? We still do not know. Following research on sovereign wealth funds, Italian FEEM research center professor Bill Megginson believes that, “Although there is currently no news coming from within companies, with regards to subsidiary companies in any other locations, they will all only have one investment decision committee.” Based on his analysis, CIC Hong Kong branch’s investment strategy will remain consistent with CIC headquarters’.

The abovementioned source close to CIC also said, “CIC International’s investment strategy will in no way differ from that of CIC headquarters. In regards to financial investors, its investment activities are on account of economic objectives, they are not efforts to seek opportunities to control any enterprise through investment." Likewise, due to economic and financial purposes, to keep within the limits of acceptable risk, CIC International will advance asset stability and effective allocation, thus maximizing shareholder benefits; passive investment and financial investment will attach the most importance to the pursuit of long-term, stable, and sustainable risk-adjusted returns.

As for the direction of investments, CIC International will primarily invest in equity shares, fixed earnings, and alternative assets.  Alternative assets investment mainly includes hedge funds, private equity markets, staple commodities, real estate investment, etc.

The establishment of CIC International will also help CIC’s investment team to make ties with Hong Kong’s banking industry and listed company supervisors, thus making CIC’s overseas investment even easier, the source said.

As a result of acting as a national sovereign wealth fund, although CIC has reiterated that their investment is based on economic and financial purposes, the company’s goals have still been called into question and its investments obstructed. Chinese University of Hong Kong’s finance department professor, MBA deputy director Wang Zeji, believes that CIC’s Hong Kong branch (CIC International) should pay more attention to maintaining relative independence: “CIC can only globalize its business by complying with commercial operations rules and avoiding being implicated in state policy.”
Map of Overseas Expansion

“Following Hong Kong, the next markets might be London, New York, etc.”, a source told our newspaper. In his view, CIC’s current focus is on increased response to the global economic and financial dialogue’s strong points. Namely, CIC will closely follow the trends of the global investment environment, promptly adjust the company’s assets configurations, and will pay close attention to risk management, prudent investment, management of company assets, and the maintenance of balanced portfolios.

The 2008 annual report showed that CIC’s registered capital of 200 billion USD had already grown to 297.54 billion USD. However, its entire year’s investment amount was barely 5.8 billion USD, with a rate of return on investment of -2.1 percent. Of CIC’s total assets, 171.15 billion USD was in the form of long-term equity investment, 56.05 billion USD was in financial assets, and only 1.949 billion USD was in equity assets.

By the end of 2009, CIC’s assets had reached 332.39 billion USD, the entire year’s new investment was 58 billion USD, and the rate of return on investment rose 11.7 percent. In total assets, long-term equity shares increased slightly to 201.4 billion USD, equity assets increased sharply to 39.83 billion USD, now nearly half the amount of the total financial assets, which rose in 2009 to 93.31 billion USD.

As for this year, although there is no public data yet available, CIC vice-general manager, chief risk officer Wang Jianxi said in June that CIC’s portfolio was distributed with about 25 percent in stocks, roughly 9.4 percent in hedge funds, 7 percent in private equity, 8.6 percent in cash, and 18.9 percent for use in special cases.

According to a research report tracking the world’s sovereign wealth funds by the Monitor International Joint Research Centre and Italy’s FEEM research center, in the first half of 2010, CIC’s 7.3 billion USD in investment had already accounted for 33 percent of all sovereign wealth investment, making it the largest. In March, America’s AES power company invested 1.58 billion USD, making it the third on the list of sovereign wealth funds investment.

Chairman of Monitor Group’s Chinese board of directors Edgar Hotard said, “At the end of its second year, CIC finally found its investment strategy.” Initially, CIC had been in contact with western banks, but mainly focused on infrastructure investment. By the end of 2008 when the global economy was steady, CIC turned his investment to stock, bad assets, and natural resources. Hotard believes that CIC will continue last year’s investment strategy and will strengthen its cooperation with other sovereign wealth funds and financial organizations.

However, regarding whether CIC will outsource part of its business to other financial institutions in the future, Chinese University of Hong Kong professor of finance Wang Zeji, MBA, believes that, “In the long run, cultivating your own talents and the ability to exercise independent judgment is extremely important--as Mr. Buffett has said, ‘Be fearful when others are greedy, be greedy when others are fearful.’”

This article was edited by Leslie Walczak