China Struggles to Find Head for Sovereign Wealth Fund
China is struggling to find a new head for its $500 billion sovereign wealth fund after two leading candidates declined the job out of fear it would prove a poisoned chalice, according to people with knowledge of the situation.
China Investment Corporation has been without a chairman since March when its former head Lou Jiwei became finance minister. The search for a replacement pears set to continue as the latest nominee, Shanghai vice-mayor Tu Guangshao, is very reluctant to take the job, the people said. They added that Yi Gang, a central bank deputy governor, had already declined the post.
"Those with the right qualifications don't want the job. Those who want the job don't have the right qualifications," said one CIC executive, who confirmed that the fund was having a hard time finding a new leader.
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CIC was founded to great fanfare in 2007 as a vehicle to generate higher returns on China's vast foreign exchange reserves. It has been courted by foreign governments and companies and its investments have spanned the globe, from Brazil to Australia and Russia.
In Europe, it has bought into satellite operator Eutelstat Communications as well as French energy group GDF Suez. Britain has been among the biggest beneficiaries with CIC taking stakes in Heathrow airport and Thames Water, and being invited to invest in London's planned "super sewer".
The concern for those who have been asked to run CIC is that the wealth fund may have nasty surprises on its books and they are afraid it will prove a poisoned chalice if they bear the blame for investments that fare poorly, the people said.
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"CIC scattered a lot of seeds quite hurriedly and widely. It's not clear how many will actually grow into trees and how many of those will bear fruit," said a senior official at a CIC-owned bank who has been briefed on the fund's portfolio.
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CIC has faced intense criticism in China for botched investments and has seen its funding squeezed by a dispute over its control.
It is well known that two of CIC's earliest investments – stakes in Morgan Stanley and private equity firm Blackstone – resulted in big paper losses when the global financial crisis erupted in 2008. The banker said some of CIC's less publicized investments in property and private equity were also under water. CIC declined to comment.
While new bosses can usually blame their predecessors for problems, the banker said this would be harder in the case of CIC because Mr. Lou is now one of China's most powerful policy makers.
China's top leaders, including Premier Li Keqiang are involved in choosing CIC's chairman, so the reluctant candidates have had to make compelling cases to turn the job down. One of the people familiar with the process said Mr. Tu had argued that he had more work to do transforming Shanghai into a global financial center, a goal that the central government has made a priority.
The leadership vacuum highlights how CIC is at risk of becoming a less central player in China's financial industry. The central bank has created a de facto sovereign wealth fund out of the State Administration of Foreign Exchange, the body which manages the country's $3.4 trillion stockpile of foreign currency holdings. Over the past five years Safe has carved off more cash to invest in stocks, property and private equity funds, covering much of the same territory as CIC.
CIC had a cumulative annualized return of 3.8 percent on its international investments from 2007 until the end of 2011. It has not yet published its detailed 2012 results but has said its performance improved, with a 10.6 percent gain last year, better than the average hedge fund return but less than the rise in the S&P 500 stock index.
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Gao Xiqing, CIC president, has been the fund's acting chief for the past two months and could end up as the default choice for chairman, two people said. Observers credit Mr. Gao with bringing professional investment discipline to CIC, but say an unwillingness to engage in politics has obstructed his promotion.
Established with $200 billion of capital, CIC pushed for a big cash infusion in 2011 when it used up this initial money. In the end it received just $30 billion, less than it expected, partly because of a bureaucratic disagreement. CIC falls under the finance ministry but the central bank is the source of its funding and wanted greater say in its management, people inside CIC have said.