Wherever you may be, we wish you and those close to you the very best Year of the Rabbit.
Congressional Research Service, “China’s Sovereign Wealth Fund,” January 22, 2008
China established its major sovereign wealth fund, the China Investment Corporation (CIC) on September 29, 2007 — six months after it first announced its intention to create such a fund. Financed with $200 billion in initial capital, the CIC is one of the largest sovereign wealth funds (SWFs) in the world.
Although many of the CIC’s initial investments were apparently political in nature, the CIC’s top management have repeatedly asserted that future investments will be commercially-based, seeking to maximize the return on investment. Since its creation, the CIC and its subsidiaries have already made several investments, including the purchase of 9.9% of the U.S. financial firm, Morgan Stanley, on December 19, 2007.
According to top Chinese officials, the CIC was created to improve the rate of return on China’s $1.5 trillion in foreign exchange reserves and to soak up some of the nation’s excess financial liquidity. Depending on its performance with the initial allotment of $200 billion, the CIC may be allocated more of China’s growing stock of foreign exchange reserves.
A number of experts in international finance have expressed some concern about the recent growth in SWFs and China’s creation of the CIC. Analysts have cautioned that major shifts in SWF investments potentially could disrupt global financial markets and harm the U.S. economy. Other experts are less concerned about SWFs and the CIC, and welcome their participation in international investment markets.
China has responded by maintaining that the CIC will prove to be a source of market stability. China has also stated that it has no intention of using its SWF to cause harm to the U.S. economy or global financial markets.
Despite China’s reassurances, there have been calls for greater oversight and regulation of the activities of SWFs. A senior official in the Bush administration has called on the International Monetary Fund and the World Bank to develop guidelines for SWFs. Some international financial experts have suggested elements to be included in such guidelines, including standards for transparency, governance, and reciprocity. Other experts have suggested that the United States should review its current laws and regulations governing foreign investments in the United States, and possibly implement special procedures or restrictions on proposed investments by SWFs. These include financial reporting requirement, limits on SWF ownership of U.S. companies, and restrictions on the types of equity investments SWFs can make in U.S. companies.
This report will be updated as circumstances warrant.
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