CIC responds to its critics

Jesse Wang, chief risk officer at China Investment Corporation, reiterates the fund has purely commercial objectives.
It was only last week that US presidential hopeful Hillary Clinton said she thought China was buying too many US Treasury securities. Speaking at the Credit Suisse Asian Investment Conference yesterday, Jesse Wang, chief risk officer at China Investment Corporation (CIC), China's $200 billion sovereign wealth fund, took the opportunity to dispel some conspiracy theories about the government's investments.

By WangÆs own admission, the speech was largely a PR exercise to set things straight in the minds of foreign investors. CIC has been in the spotlight since it was established in September 2007 and took a stake in US private-equity group Blackstone. Wang acknowledged that sovereign wealth funds have been given a bad name but denied allegations that the fund has hidden objectives in its investment strategy. He says some of the nationalist and protectionist sentiments that have been expressed are to be expected.

Sovereign wealth funds are ultimately the by-product of globalisation and are a way for emerging markets to better utilise their growing resources, Wang says. These funds reflect the wealth generated in economies that are enjoying higher economic growth and rising employment, but also excessive liquidity.

Wang told the gathering that CIC is purely a fund designed to resolve these macroeconomic issues, although it occasionally has ôslip-upsö over investment decisions, a self-deprecating remark that left the audience laughing. He acknowledged that the fundÆs investments in Blackstone and Morgan Stanley were not performing and also that several of its IPO investments were trading at below issue price.

Unlike its counterparts from the Gulf States, Wang notes, CICÆs fund source did not come from petrodollars. ChinaÆs total foreign reserves have grown from only $16 billion a decade ago, as exporters have remitted the overseas earnings. The Chinese government buys these foreign currencies from Chinese commercial banks by issuing Chinese government bonds and papers. These foreign reserves are then invested in US Treasury bonds as a way of offsetting liquidity. With the establishment of the CIC, the government is looking to achieve a higher rate of return than that offered by Treasury bonds.

The CIC follows successful examples such as the Korean Investment Corporation, Malaysia's Khazanah Nasional and Australia's Future Fund. CIC's long-term objective means it operates like a pension fund.

The government has also charged CIC with improving corporate governance standards among Chinese financial institutions. Last year, the CIC deployed $60 billion of its capital to take over Central Huijin, a government agency holding shares in state-owned enterprises, and another $20 billion in recapitalising the China Development Bank.

CIC now allocates two-thirds of its capital for domestic investments. Another one-third of the balance is earmarked for overseas markets. Wang believes in the six months since its set-up, the fundÆs chief achievement lies in getting the asset allocation right, although there is still ambiguity over its performance objectives. External investment consultant and advisory teams have helped CIC define its asset allocation and set a risk budget constraint for these portfolios.

The fund also tries to model itself on commercial lines. Its investment teams are organised in distinct asset class groups û equity, fixed income, hedge funds, private equity and other alternative sections, which come up with investment ideas and report to a chief investment officer. Before any investment becomes a reality, their research reports have to go through an investment decision committee and risk management group, both of which have veto power over the managers.

He assured the audience that the fund has clear corporate governance in place. Its performance is scrutinised by an 11-member board, which is a collection of CSRC, CBRC, government officials, CIC executives and an independent member. The fundÆs annual reports are also audited by the governmentÆs general auditory office.

He says alternative strategies and emerging economies are among the possibilities the fund will pursue. However, he says, ôOur decisions have to back the central bank.ö While the fund feels it is ready to graduate into more sophisticated investments, it is mindful some of its investment might end up re-exporting liquidity to fuel inflation in ChinaÆs economy.

CICÆs size has helped it attract top talent from international markets but this remains difficult. Like China's mutual-fund companies, CIC cannot offer staff share options or bonuses explicitly linked to AUM or investment performance. Nor does it intend to compete head on with international market practice, says Wang.

While he refuses to be specific about the fund's target return, Wang is open about the fundÆs fallibility: ôOur lack of experience combined with a lot of money is a challenge for us.ö

CIC has recently announced its plan to outsource some of its assets to external management. The announcement has attracted over 200 fund managers to bid on four mandates, which include global equity, global fixed income, emerging markets and EAFE markets. Wang notes the fund does not plan to manage the majority its assets centrally, and that more of its cash-based assets will be outsourced over the long run.
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