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Congressional Research Service, "China’s Sovereign Wealth Fund: Developments and Policy Implications," September 23, 2010
China’s ruling executive body, the State Council, established the China Investment Corporation (CIC), a sovereign wealth fund, in September 2007 to invest $200 billion of China’s then $1.4 trillion in foreign exchange reserves. As with other sovereign wealth funds worldwide, the CIC’s existence allows China to invest its reserves in a wide range of assets, including stocks, bonds, and hedge funds. After a rocky start in which it incurred losses of 2.1% on its global investments in 2008 – caused in part by aftereffects of the global financial crisis of 2007 – the CIC’s rate of return in 2009 rose to 11.7%. The State Council is reportedly considering a CIC request for an additional $200 billion out of China’s $2.5 trillion in foreign exchange reserves.
Congress and financial analysts raised concerns about the CIC after its creation, partly because it was a comparatively large sovereign wealth fund, partly because it was government-owned, and partly because it reported directly to the State Council. Some observers were apprehensive that the Chinese government would use the CIC to acquire control over strategically important natural resources, obtain access to sensitive technology, and/or disrupt international financial markets. The CIC attempted to counter these concerns by announcing that its investment strategy would conform to international standards, and sought only to maximize its “risk-adjusted financial return.” The CIC also promised to avoid politically and strategically sensitive investments.
The CIC has been the focus of discussions among China’s leadership about its economic objectives and its organizational structure. Soon after its creation, the CIC became the sole owner of Central Huijin Investment Limited (Central Huijin), an investment fund established by China’s central bank, the People’s Bank of China (PBOC), as a vehicle for injecting capital into major Chinese banks. Over the last three years, Central Huijin has provided billions of dollars to the Bank of China (BOC), the China Construction Bank (CCB), the Industrial and Commercial Bank of China (ICBC), and other financial institutions. Some analysts maintain that there is an inherent conflict between the CIC’s goal to maximize its return on investments and Central Huijin’s mission to provide capital to domestic financial institutions, and advocate their separation. While there have been reports of a possible separation, Central Huijin remains a subsidiary of the CIC.
Concerns about the CIC’s investment activities reemerged in 2009 when it greatly expanded its overseas holdings, and began acquiring stakes in energy companies, natural resource companies and alternative energy companies. According to its filings with the Security and Exchange Commission (SEC), the CIC had holdings in 82 U.S. entities as of December 31, 2009.
Commentators once again questioned the true goals of the CIC’s investment strategy. The CIC maintains that its main mission is to maximize its long-term, risk-adjusted rate of return.
For Congress, the investment activities of the CIC and its subsidiary, Central Huijin, raise questions about U.S. policies on inward foreign direct investment (FDI) and the global competitiveness of U.S. financial institutions. Some question if the current controls on inward FDI via the Committee on Foreign Investment in the United States, SEC, and other agencies provide adequate protection of U.S. strategic assets and technology from investments by the CIC and other Chinese entities. Others are concerned that Central Huijin’s assistance to Chinese banks and financial institutions are part of a larger strategy to increase China’s influence in strategic markets. These commentators suggest that more should be done to protect the United States from China’s rising role in international capital markets.
This report will not be updated.
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