Interest Payments? That's None of CIC's Business

August 29 is the second interest due date for the RMB 600 billion special national debt number 0701, and the total payment will be as high as RMB 12.9 billion. Around the first interest due date, the market worried the heavy interest would bring unbearable pressure to bear on China Investment Corporation (CIC), China’s sovereign wealth fund. It didn’t. The interest on special national debt number 0701 is, in fact, not paid by CIC but by the Ministry of Finance, in return for which CIC pays a portion of its profits to the Ministry.

CIC’s capital funds come from China’s official foreign currency assets, purchased with RMB 1.55 trillion of special national debt issued by the Ministry of Finance. The 10-year special national debt 0701 was issued on August 29, 2007, with a coupon rate of 4.3%, payable twice yearly on February 28 and August 29. On those days, somebody needs to pony up the RMB 12.9 billion that needs to be paid.

CIC doesn’t pay interest on the special national debt, but only needs to pay part of its profits to the Ministry of Finance. An official in the Ministry of Finance said that since the debt was issued by the Ministry of Finance, it is also responsible for paying the debt’s interest.

According to a CIC official, the Ministry of Finance has set up an account for the special national debt that is funded mainly from CIC profits that have been paid to the Ministry of Finance. The Ministry of Finance pays interest on the special national debt with these funds.

"CIC does not pay a certain amount of money to the Ministry of Finance on every interest due date, but pays profits or dividends according to its own profit-making capability and dividends distribution plan decided by its board of directors," the official said

According to CIC’s annual financial report for 2007, Central Huijin, CIC’s wholly-owned subsidiary, took in RMB 32.5 billion, 15.7 billion and 17.1 billion in dividends, respectively, from the China Construction Bank, the Industrial and Commercial Bank of China, and the Bank of China, a total of 65.3 billion yuan.

A Ministry of Finance official said with dividends from these banks, CIC can cover the Ministry of Finance’s interest costs with no difficulty.

As the plan for CIC was developing, researchers debated over who should be responsible for the costs of the special national bonds. Some considered the large interest payments a heavy burden for CIC. Under the present arrangement that has turned out not to be true.　

CIC has not always been so fortunate. Some of the fund’s overseas investments, which include stakes in Black Stone, Morgan Stanley, and China Railway, have suffered heavy book losses.