From Money & Investment, page 17, issue no. 374,June 30, 2008
Translated by Ren Yujie
Original article: [Chinese]

China Investment Corporation (CIC), the country's 200-billion-dollar-strong sovereign wealth fund, has entrusted Morgan Stanley to plan the asset allocation model for its overseas investment fund worth 80-billion-dollars.

The EO learned that based on the Morgan Stanley model, the 80-billion-dollar fund would be divided into two parts – 70 billion dollars to be handled by several professional assets management companies that win bids according to product categories, while the remaining seven to ten billion dollars would be handled by one company appointed by the CIC for flexible investment.

Last December, the CIC injected five billion dollars into Morgan Stanley, and the international financial services firm has now becomes the sole designer for its asset allocation formula.

However, the formula would not in anyway affect the outcome of bidding, as long as the CIC remained transparent and bidders could compete fairly for fund management rights, said an industry player.

Keen Bidders
Based on the suggested formula, once the successful bidders emerged for each financial product, the entrusted companies would be given an investment timeline and relatively stable funding that would not undergo adjustments for up to three years.

Among the product categories up for grabs included emerging market equities, US equities, and European bonds.

The bidding war has already started. The CIC held that each bidding institution could only compete for up to two investment categories. The EO learned that globally renowned asset management and investment firms such as Goldman Sachs, UBS and Morgan Stanley had all bid for two types of investment.

At present, the most vigorous asset management players in the global financial markets could be divided into two types. The first included international investment banking firms like Goldman Sachs and Lehman Brothers. The former, for instance, is one of the world's largest asset manager, overseeing 873 billion dollars of funds by year-end 2007 and enjoying a net income of 4.47 billion dollar. Another type of player was basically made up of professional fund managers.  

An in-circle source said the CIC was more inclined to entrust the 70-billion-dollar fund to professional asset management companies than investment banking firms, as the latter undertook diversified businesses like underwriting, consultancy, private equity and more, and thus were exposed to conflicts of interests.

Instead, the CIC would prefer asset management companies with abundant experience and a track record of stable and high investment returns in specific fields, the source added.

As for the remaining seven to ten billion dollars in flexible investment funds, the CIC has intended to entrust only one company. Both Goldman Sachs and Morgan Stanley showed keen interests in such large amounts of funds.

Competing Strategies
The EO learned that Goldman Sachs had proposed to set up a joint venture with the CIC. The proposed formula was similar to the joint venture announced three months ago between the CIC and JC Flowers to set up a four-billion-dollar fund, of which, the former invested 3.2 billion dollars while the latter came up with 800 million.

Being among the top investment bank on Wall Street, Goldman Sachs has a track record of high returns, having survived the US subprime crisis better than other peers, unlike Morgan Stanley and Merril Lynch, which suffered huge losses in the crisis.

Goldman Sachs CEO Lloyd Blankfein had visited China and met CIC Chairman Lou Jiwei in Beijing recently. They held a three-hour conference, said an insider source, who added that the CIC expressed keen interest in Goldman Sachs' suggestions.

Similarly, Morgan Stanley had also mapped out a plan. One of the most successful portfolios at Morgan Stanley was its 10 to 12-billion-dollar Teacher Retirement System in Texas. This project alone brought millions of net income to Morgan Stanley yearly.

Sources revealed that Morgan Stanley would take advantage of the shareholders meeting to be held in New York soon for its second quarter financial report disclosure.

Representatives of CIC, as a stakeholder, would attend the meeting and they would be introduced to managers of the Texas Teachers Retirement System to learn about the success story. Sources said the arrangement would be part of Morgan Stanley's strategies to win over the CIC's flexible fund.

How Much Money is Truly Available?
Once the successful bidders for the 80-billion-dollar funds emerged, how the 200-billion-dollar strong CIC would handle the rest of its assets would come into focus.

At present, Huijin Company – the state investment arm that has been absorbed into the CIC late last year – has already injected 80 billion dollars into three Chinese state commercial banks and the China Development Bank.

In addition, it has also invested some five billion dollars in Everbright Bank and other securities firms. Another 40 billion dollars investment for the Agriculture Bank of China is pending. Thus, investment through Huijin alone would amount to about 125 billion dollars.

That would leave CIC with about 75 billion dollars for international investment. After considering a few projects that have taken place – three billion dollars in Blackstone, five billion dollars in Morgan Stanley and 3.2 billion dollars for joint venture with JC Flowers, the available funds at hand would be brought down to less than 60 billion dollars.

However, the CIC has entrusted Morgan Stanley to plan out asset distribution for 80-billion dollar worth of funds.

"This presents two possibilities. One being the CIC would be allocated more foreign exchange reserves for investment. The other being a change of mind for initially intended projects. Either way, it is a big thing," said one senior financial expert.