China may restructure sovereign wealth fund - sources

BEIJING (Reuters) - Beijing is considering restructuring China Investment Corp (CIC), its $300 billion sovereign wealth fund, in a bid to boost accountability, two sources with knowledge of the plan said.

An employee counts U.S. currency near renminbi notes at a bank in Hefei, Anhui province, December 3, 2008. REUTERS/Stringer/Files

The proposed reorganisation, which is bound up with manoeuvrings among China’s political power brokers ahead of the Communist Party’s five-yearly congress in 2012, could result in a sharper focus by CIC on its overseas portfolio.

CIC has been aggressively investing across the globe since it was established in September 2007, but like other Asian sovereign funds it has been burnt by some of its early forays into the U.S. financial industry.

One proposal calls for CIC to be broken up into three parts, two of which would focus on equity and strategic resources investment, one source with direct knowledge of the matter told Reuters, requesting anonymity because he was not authorised to speak to reporters.

Another suggests CIC and its wholly owned subsidiary, Central Huijin Investment Ltd, part ways, a second source said.

Huijin, which holds Beijing’s stakes in key domestic state-owned financial institutions, came under CIC’s wing when the latter was set up.

“There is no timetable for CIC and Huijin going separate ways,” said the second source, who also requested anonymity. “The State Council has yet to make known its position.”

China’s sovereign wealth fund is accountable to the State Council, China’s cabinet, which has the final say on the planned restructuring.

CIC and the Finance Ministry had no immediate comment.


Analysts say making Huijin independent could elevate its status within the Chinese bureaucracy, giving it more power as the largest shareholder in China’s biggest banks.

“There are huge differences between international investments and domestic financial asset management. So there is good reason for the two to separate,” said Guo Tianyong, a professor with the Central University of Finance and Economics.

For its part, CIC could find that without links to Huijin it can make a stronger case to foreign governments that it should be treated as a commercial entity rather than as a policy arm of the Chinese government.

A stronger focus on international investments could also mean the fund stands a better chance of being handed another chunk of China’s $2.45 trillion worth of international reserves, which are managed conservatively by the central bank.

CIC was set up with the aim of seeking higher returns from riskier investments for part of the country’s stockpile of foreign exchange, by far the largest in the world.

To create CIC, the Finance Ministry issued 1.55 trillion yuan in special bonds to buy about $200 billion of the reserves from the People’s Bank of China.

That sum had grown to almost $300 billion by the end of 2009, thanks largely to the rising value of Huijin’s bank stakes, and CIC has been lobbying for additional funding as it scours the globe to secure natural resources for China’s thrumming economy.

But CIC’s start was rocky.

The fund came under fire from critics in the Communist Party after big paper losses on early high-profile investments in U.S. private equity firm Blackstone and Wall Street investment bank Morgan Stanley.

“No one is held accountable when an investment loses money,” the first source said.

“CIC will undergo restructuring because it is too big, which is not ideal,” the source said.

CIC repeatedly stresses that it is a financial investor, seeking high returns not corporate control.

But some Western critics fear state-owned sovereign funds will build up stakes in leading companies that will give them influence in politically sensitive sectors.

(Additional reporting by Xie Heng and Shen Yan; Editing by Alan Wheatley and Don Durfee)

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