An agency with teeth

Even before it had a name, China’s sovereign wealth fund had teeth. Perhaps it was because the country’s US$1.3 trillion in foreign currency reserves have over the years succeeded in capturing the imagination. That much money … in one single place … just waiting to be spent.

Obviously the nation’s forex management system amounts to more than a giant mattress stuffed with cash – although, given the relatively thin returns being generated by US Treasury bond investments, it might be argued that it wasn’t so different.

This made the creation of the sovereign wealth fund all the more exciting. Its brief appeared no more specific than finding better investment options than government debt. This was the fund that would buy all the oil, soybeans and American corporations it could get its hands on. The US$3 billion investment in US private equity group Blackstone only added to the fervor.

Several months on, the fund has been officially launched, christened China Investment Corp (CIC) and capitalized to the tune of US$200 billion. And recently, the public was given a little more insight into how the new agency will spend its money. Vice Finance Minister Li Yong was quoted by state media as saying that only a third of the US$200 billion would be invested abroad, and it would avoid the aviation, oil and telecom sectors.

This isn’t surprising. Given the nature of the fund, Beijing wants to dial down the controversy – and it can always leave the dirty work to the likes of PetroChina and Sinopec.

The remaining two-thirds will be invested domestically, Li said, focusing in particular on the banking sector. As has already been widely suggested, CIC will buy Central Huijin, the investment arm run by the People’s Bank of China (PBOC).

Huijin has been responsible for recapitalizing China’s Big Four state banks in recent times. It used money from the forex reserves to write off the bad debts and, in return, took huge blocks of shares in the state lenders. These will now go to CIC.

It appears that CIC will also assume Huijin’s role as sugar daddy to the institutions that are still struggling, as a portion of its funds will be used to bail out Agricultural Bank of China (ABC) and China Development Bank (CDB).

While ABC and CDB are in need of money, the three Big Four banks that are listed are rolling in it. Profits are skyrocketing and CIC will get rich off the back of it.

But more important than money is power. As a prime stakeholder in the institutions that meet the bulk of the nation’s financial needs, CIC is in an influential position. For example, when Temasek, Singapore’s state investment arm, halved its pre-IPO stake in Bank of China it is said to have done so due to pressure Central Huijin. It is here that the different regulatory agendas become tangled. CIC answers to the State Council not the Ministry of Finance (MOF) or the PBOC. Yet its head is a former top official at the MOF and its new asset, Central Huijin, was formerly the property of the PBOC. Who, we might ask, does the CIC really answer to?

Apparently, there has been fierce competition among China’s different financial regulators for seats on the CIC management committee. It remains to be seen how these pressures will come to bear on the fund’s investment strategy.