Published: 2007-12-06

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.

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