Day of Reckoning for China's Sovereign Fund

China's sovereign wealth fund has overly concentrated its investments in financial assets, leaving it little room to take further advantage of the credit crunch and facing difficulty in paying off debt. Though it has significant stakes in Morgan Stanley, Blackstone, the Bank of China, the Construction Bank of China, and ICBC, it may have trouble gathering enough revenue from dividends to make interest payments in February on its debt.

From Cover, issue no. 352, Jan. 28th 2008. Translated by Ren Jie

On one day in mid-January, Gao Xiqing and his team from the China Investment Company, the new body charged with putting China's foreign exchange reserves to better use, held a closed-door conference with executives from Goldman Sachs. It was the last day for the CIC to settle on which foregin financial institutions would serve as its fund managers.

Those chosen by the CIC will take charge of approximately 70 billion dollars, a significant portion of which has been earmarked by the CIC for overseas investment, and which comes with high standards for returns.

A steep challenge, but one the CIC desperately needs to overcome--it will pay 12.9 billion yuan in interest in February, the first part of interest payments it must make on the 1.55 trillion yuan in special national debt bonds that were floated during its founding.

And although the spreading of the US sub-prime lending crisis has created a window of opportunity for the CIC to make investments abroad, it has already made deep investments in the financial industry and is facing increasing pressure to diversify its investments.

Fund managers from global institutions the world over descended on Beijing en masse since the CIC announced on December 12th that it would be looking for investment managers, all looking for a piece of the 70 billion dollar pie. Aside from this, the CIC has brought on Boston-based firm Cambridge Associates for various strategic consulting services.

In a forum held at the end of last year, the chairman of CIC Lou Jiwei announced that the CIC would begin investing 70 billion dollars overseas step by step. He also said that in 2008, the CIC would increase investments in index products and bond markets, while expanding investment areas in general as well.

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