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CIC Set for Up to $200 Billion in Fresh Funds

China Investment Corp, the Chinese sovereign wealth fund, will soon receive $100bn-$200bn in new funds from the government, according to three people familiar with the matter.

Beijing, China
Sam Diephuis | Getty Images
Beijing, China

CIC, which has already fully allocated the $110 billion it had available for offshore investments, is to get the new money as Beijing seeks to reduce its exposure to US government debt. “There has been bureaucratic bickering for a year,” said one person familiar with the matter. “It has been difficult to resolve.”

Recently, a number of senior officials, including China’s central bank governor, have said the country’s foreign exchange reserves are excessive and beyond “reasonable requirements”.

The reserves, already the largest in the world, grew by nearly $200bn in the first quarter to top $3,000bn for the first time. In the past week, two senior government economists have publicly said China only needs reserves of around $1,000bn.

CIC was established in 2007 with the mandate to invest some of the country’s foreign reserves in riskier offshore assets. At that time, China had less than $1,500bn in its foreign exchange coffers.

While the fund suffered some early missteps — investing in US private equity firm Blackstone and in Morgan Stanley before their shares plummeted in the global financial crisis — people who deal with the fund say CIC has grown in professionalism and confidence.

“They had a lot of growing pains in the beginning but now they know more,” says one private equity executive. “They will be smarter and more rigorous going forward.”

In addition to handing more money to CIC, Beijing is also considering using the reserves to set up a variety of new special-purpose funds that would invest in sectors such as energy and precious metals, as well as a foreign-exchange stabilisation fund, according to a Chinese media report on Monday, citing unnamed sources.

Debate has raged among policymakers in Beijing for more than a year over how much more money CIC should receive, while the central bank and the ministry of finance have fought a bureaucratic turf war over whether the central bank should have more control over the fund.

The central bank had proposed that the State Administration of Foreign Exchange, an agency under the central bank which manages the forex reserves, either invest directly as a shareholder in CIC or hand CIC a mandate to manage a certain amount of reserves on its behalf.

Those suggestions were eventually rejected, according to people familiar with the matter, and CIC will now probably receive the money from the finance ministry, its shareholder and biggest champion, as occurred when it was initially capitalised in 2007.

At that time, the ministry issued renminbi bonds and used the proceeds to buy foreign exchange from the central bank.

After its initial investments in western financial institutions, CIC has increasingly focused on offshore investments that take advantage of China’s economic boom. Besides focusing on natural resources and energy, it is also increasingly interested in investing in Chinese companies listed offshore.

Recently, for example, it took a stake in SMIC, a semiconductor company listed in Hong Kong but with all its assets in the mainland. In addition, it recently began asking some of its private equity partners for co-investment stakes in China deals, an indirect way to invest in China.

However, much of what CIC does is hard to track because it often uses private equity firms to act on its behalf as it did when Blackstone bought Morgan Stanley’s troubled property loan portfolio in Japan last year at CIC’s behest.

In general, state-owned Chinese companies in particular are rapidly expanding their investments abroad with direct encouragement from Beijing. China’s non-financial outbound foreign direct investment totalled $48bn in 2009, 48 times the amount in 2002, according to UN figures. From focusing almost exclusively on securing offshore supplies of natural resources Chinese companies are now interested in a wide range of industries, especially ones where they can acquire technology.

China’s non-financial offshore interests are dwarfed by its financial investments abroad, which mostly go into low-yielding but relatively safe government bonds.