By Ouyang Xiaohong (歐陽曉紅)
Market, page 19
Issue No. 543
Nov 7, 2011
Translated by Pang Lei
Original Article: [Chinese]

China's State Council has approved a plan to separate the international operations of the country's sovereign wealth fund China Investment Corp. (中國投資有限責任公司) from its wholly-owned, domestically-focused unit Central Huijin Investment Ltd. (中央?yún)R金投資有限責任公司) so that the two companies operate as separate subsidaries under the control of CIC.

A source has told the EO that the government will establish a new entity, CIC International (中投國際), that will focus on overseas investment, the new entity will be a wholly-owned subsidary of the CIC parent company, with the Ministry of Finance (MOF) and the People's of Bank of China also taking shares in the company.

The newly-formed CIC International will be separated off from Central Huijin, becoming something of a "mini CIC," though both companies will still be under the control of the larger CIC entity.

On Nov 3, CIC announced that China Investment International (Hong Kong) Co., Ltd., which was first established at the end of last year, was closer to becoming fully operational with the appointment of senior executives, including Fan Kungsheng (樊功生), who will serve as the CEO of the company.

It's possible that CIC International (Hong Kong) will become a subsidary of the yet-to-be established CIC International.

After the restructuring, CIC will retain a controlling stake in Central Huijin, the state parent of China's major banks.

However, ongoing negotiations about how much fresh capital the central government will inject into CIC are still being conducted.

Bureaucratic infighting and debates over the proper role for CIC have held up the capital injection process, observers have said.

According to analysts, there are three proposals under consideration. The first would involve the MOF issuing special bonds the proceeds of which would be used to purchase foreign exchange reserves from the central bank, which would then be used to invest in CIC.

The second option is for the central bank to directly invest in CIC through the purchase of a larger stake in CIC.

The third alternative is for the central bank to entrust the management of a portion of their foreign exchange reserves to CIC.

It's commonly believed that the MOF favours the first option and that the central bank favours the second, as it hopes to gradually take a controlling share in the company.

Analysts believe that the inability of the two ministries to agree on either the size or method of new investment for CIC, all comes down to jockeying for control of CIC.

The chairman of CIC Lou Jiwei, has already publicly stated that he supports the first option. In an article published in Caixin Century Magazine (新世紀周刊) in July this year that was later translated into English and was published on , Mr. Lou argued that China "should study other major countries, use the financial administration to issue debt, buy foreign exchange reserves, and entrust these reserves to the central bank for management."

CIC was founded in late 2007 with $200 billion in funds that the Ministry of Finance raised through the purchase of foreign exchange from the central bank, paid for by issuing special treasury bonds worth 1.55 trillion yuan at an annual rate of between 4.3 and 4.69 percent. One of the reasons the fund was established was to help the central government earn higher returns on the large amount of foreign exchange holdings.

About half of the funds raised were transferred to Central Huijin, which used the cash to take large stakes in China's largest commerical banks. CIC that used the remaining $100 billion for overseas investments.

The 2008 annual report showed that CIC's registered capital of $200 billion had already grown to $297.54 billion. However, only $5.8 billion had been invested abroad, with a rate of return on investment of -2.1 percent.

Of CIC's total assets, $171.15 billion was in the form of long-term equity investment, $56.05 billion was in financial assets, and only $1.95 billion was in equity assets.

By the end of 2009, CIC's assets had reached $330 billion, with new overseas investment for the year totalling $58 billion, the rate of return on investment rose to 11.7 percent.

In total assets, long-term equity shares increased slightly to $201.4 billion, equity assets increased sharply to almost $40 billion, nearly half the amount of the total financial assets, which rose in 2009 to 93.31 billion USD.

In 2010, CIC recorded an 11.7 percent return on its global portfolio, the same as that in 2009. It reported a net profit of $51.5 billion for last year, up from $41.7 billion in 2009.

By the end of 2010, CIC's assets totaled $410 billion.

Links and Sources
Economic Observer: China Investment Corporation’s First Subsidiary Appears in Hong Kong
CIC: Official Site