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Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
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16 East 34th Street, 4th floor---------------------- Stuart Basefsky
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Congressional Research Service (CRS)

 

China’s Sovereign Wealth Fund: Developments and Policy Implications

Michael F. Martin, Specialist in Asian Affairs

September 23, 2010

http://opencrs.com/document/R41441/2010-09-23/download/1013/

[full-text, 16 pages]

 

Summary

China’s ruling executive body, the State Council, established the China Investment Corporation

(CIC), a sovereign wealth fund, in September 2007 to invest $200 billion of China’s then $1.4

trillion in foreign exchange reserves. As with other sovereign wealth funds worldwide, the CIC’s

existence allows China to invest its reserves in a wide range of assets, including stocks, bonds,

and hedge funds. After a rocky start in which it incurred losses of 2.1% on its global investments

in 2008 – caused in part by aftereffects of the global financial crisis of 2007 – the CIC’s rate of

return in 2009 rose to 11.7%. The State Council is reportedly considering a CIC request for an

additional $200 billion out of China’s $2.5 trillion in foreign exchange reserves.

 

Congress and financial analysts raised concerns about the CIC after its creation, partly because it

was a comparatively large sovereign wealth fund, partly because it was government-owned, and

partly because it reported directly to the State Council. Some observers were apprehensive that

the Chinese government would use the CIC to acquire control over strategically important natural

resources, obtain access to sensitive technology, and/or disrupt international financial markets.

The CIC attempted to counter these concerns by announcing that its investment strategy would

conform to international standards, and sought only to maximize its “risk-adjusted financial

return.” The CIC also promised to avoid politically and strategically sensitive investments.

 

The CIC has been the focus of discussions among China’s leadership about its economic

objectives and its organizational structure. Soon after its creation, the CIC became the sole owner

of Central Huijin Investment Limited (Central Huijin), an investment fund established by China’s

central bank, the People’s Bank of China (PBOC), as a vehicle for injecting capital into major

Chinese banks. Over the last three years, Central Huijin has provided billions of dollars to the

Bank of China (BOC), the China Construction Bank (CCB), the Industrial and Commercial Bank

of China (ICBC), and other financial institutions. Some analysts maintain that there is an inherent

conflict between the CIC’s goal to maximize its return on investments and Central Huijin’s

mission to provide capital to domestic financial institutions, and advocate their separation. While

there have been reports of a possible separation, Central Huijin remains a subsidiary of the CIC.

 

Concerns about the CIC’s investment activities reemerged in 2009 when it greatly expanded its

overseas holdings, and began acquiring stakes in energy companies, natural resource companies

and alternative energy companies. According to its filings with the Security and Exchange

Commission (SEC), the CIC had holdings in 82 U.S. entities as of December 31, 2009.

Commentators once again questioned the true goals of the CIC’s investment strategy. The CIC

maintains that its main mission is to maximize its long-term, risk-adjusted rate of return.

 

For Congress, the investment activities of the CIC and its subsidiary, Central Huijin, raise

questions about U.S. policies on inward foreign direct investment (FDI) and the global

competitiveness of U.S. financial institutions. Some question if the current controls on inward

FDI via the Committee on Foreign Investment in the United States, SEC, and other agencies

provide adequate protection of U.S. strategic assets and technology from investments by the CIC

and other Chinese entities. Others are concerned that Central Huijin’s assistance to Chinese banks

and financial institutions are part of a larger strategy to increase China’s influence in strategic

markets. These commentators suggest that more should be done to protect the United States from

China’s rising role in international capital markets.

 

This report will not be updated.

 

Contents

Introduction ...............................................................................................................................1

Background ...............................................................................................................................2

Overview of the CIC...................................................................................................................3

The CIC’s Investment Activities..................................................................................................4

Investments by the CIC.........................................................................................................4

Investments by Central Huijin...............................................................................................7

China’s Debate over the Role of the CIC.....................................................................................8

Concerns About the CIC .............................................................................................................9

Congressional Considerations ...................................................................................................10

Tables

Table 1. Leading Sovereign Wealth Funds (as of April 2008).......................................................1

Table 2. Major Investments by the CIC .......................................................................................5

Table 3. the CIC’s Global Portfolio Holdings by Type of Investment ...........................................7

Table 4. Central Huijin’s Investments ..........................................................................................8

Appendixes

Appendix. The CIC’s Holdings of Companies, Investment Funds, and Index Funds...................12

Contacts

Author Contact Information ......................................................................................................13

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