CIC Rescues Investment But Still Faces Criticism at Home

It appears that the China Investment Corporation (CIC) may not lose any of its $5.4 billion investment in the Reserve Primary Fund (RPF), a US money market fund that last month suspended withdrawals. CIC had already ordered redemption before the suspension, and RPF has confirmed the return of CIC’s investment with interest in a written verification

However, it is seen in China as yet another of CIC’s investments in the US to have gone wrong and has again triggered criticism from the public and government officials. CIC’s several investments in the US have all suffered losses, among them $5.6 billion invested in Morgan Stanley in December 2007, and $3 billion in Blackstone in June 2007. Its investment in Blackstone has seen a 75% book loss. 

Disagreement exists in Beijing on whether it is a proper time for China to acquire assets on Wall Street or whether China should buy the US national debt to support the US government’s rescue package. This new issue offers yet another reason to people antipathetic to China’s overseas financial participation.   

CIC’s subsidiary Stable Investment Corporation invested in the Primary Fund, operated by Reserve Fund. RPF's crisis was triggered on September 16 when it was forced to value $785m worth of Lehman Brothers debt securities at zero in the wake of the investment bank filing for bankruptcy protection. The fund was inundated with withdrawal requests, and had to freeze redemptions after its share price dropped to 97 cents.  In money market terms, when it’s share price fell below $1, it "broke the buck."

Stable Investment Corporation is into RPF for $5.4 billion. "Now CIC is no longer the fund’s investor, but its creditor," declared CIC yesterday in a statement. According to the announcement from Reserve Fund, investors who hadn’t redeemed their funds before the suspension of withdrawal may suffer 3% capital fund loss. However, since CIC’s redemption order came before the suspension, it refuses to bear such a loss.

CIC said the company is closely observing the fund’s asset liquidation and distribution, and has contacted officials in the US, emphasizing the fund’s full repayment promise to CIC and its legal rights, and urging all parties to promote the capital return.

CIC says that the Primary Fund has promised a payment of about 35% of the total, and is formulating a repayment plan for the rest under the guidance of the U.S. Securities and Exchange Commission (SEC). A CIC spokesman told China Business News yesterday that funds would be returned to all relevant parties, but he refused to reveal how much CIC would get.

CIC has contacted the SEC through its overseas lawyer. "CIC requires the SEC to value our legal right to get full repayment," said CIC in its statement.

 If CIC ordered redemption of its funds and the fund company agreed, even if the funds have not been returned to CIC’s account, CIC has become the fund’s creditor, instead of its investor, and its right is prior to that of shareholders or other investors, according to claim procedure.

Now the fund is in the process of liquidating its assets, and is expected to make an initial distribution of $20bn to remaining investors on Monday. Reserve Fund has applied to participate in the US Treasury’s Temporary Money Market Fund Guarantee Program.