A Good Time to Invest in the US Gives CIC Hard Time

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The CIC only has to look at its $3 billion investment in Blackstone, which has now suffered a close to 50% book loss, to see an example of inexperienced speculation.  

The recent market turmoil has also been a major challenge for the CIC. Wang Jianxi said it was a good time to invest in the US, adding that the CIC hadn’t "completely thought out’�previous investments.

Another obstacle to the development of the CIC has been its rigid compensation system which has made it very hard for the company to recruit talented individuals. Since the CIC is a state-owned enterprise, its compensation system is controlled by the government instead of the market. This has resulted in low salaries, making it hard for the CIC to recruit experts in this highly competitive market.  

The CIC has never officially revealed its targeted rate of return. "We think we are rather conservative, the target rate of return is somewhere in the middle of the single digit range, or a little bit higher.’�said Wang Jianxi when first responding to such questions. In other words, the target rate of return for the CIC’s investments is about 5% or slightly higher. Considering the 4% rate of return for the US government bonds, and the costs of investment management, the 5% investment return can not even cover its cost of opportunity. The State Council requires that the CIC’s investment rate of return should at least surpass that of the long-term foreign exchange reserve.  

Although the CIC’s total capital is of about $200 billion, only about 1/3 of the total, between $70 billion and $80 billion, are actually invested overseas, another 1/3 is being used to acquire Central Huijin, while the remaining 1/3 is being used for the recapitalization of state-owned banks, such as the China Development Bank and the Agricultural Bank of China. Indirect investment, or fund management entrustment, accounts for a lion’s share of CIC’s overseas investments, only a small part of which consists of direct investment.

In the past few months, the CIC has been busy constructing all of the company’s organs, setting up a Board of Directors, building up management, and shaping up all departments. The CIC has also established an investment committee and a risk management committee.

Some investment decisions, such as the investment in Blackstone and Morgan Stanley were made by the CIC itself. The CIC has now set up a stock investment department, a department for fixed gain investment, and an alternative investment department. These department’s investments suggestions will be reported to the risk management committee, and then to Chief Investment Officer, finally coming before the investment committee.

Wang Jianxi said the company had defined itself as a large-sized public pension fund; this helped to delineate its operation and management model.

As to the "game rules" that western countries are planning to formulate for SWFs as a result of doubts over the latter’s lack of transparency, Wang insisted that the CIC was one of the most transparent SWF across the world.

Wang believes that the CIC had only been the target of criticism because the company’s establishment and its investments in overseas markets have been closely followed by the media. Comparatively, Wang said, the Government Investment Corporation of Singapore (GIC) had seldom been criticized because it has never revealed its investment details.

Wang also believes that the company’s structure, the strategic layout of its fund, and the process of recruiting global fund managers, have been highly transparent.

It has been revealed that the CIC has finished short-listing stock fund manager candidates and fixed-gain fund manager candidates after receiving over 100 applications for stock fund manager, and nearly 100 applications for fixed-gain fund manager. The company will start interviewing these overseas fund managers from next Monday (April 7^th) onward.