KEY POINTS:
China Investment Corp., the nation's US$200 billion ($246 billion) sovereign wealth fund, has started operations as the Government seeks to boost returns on the world's biggest foreign-exchange reserves.
The investment agency will come under the direct supervision of the nation's cabinet, the State Council. Lou Jiwei, former vice finance minister, will act as director and Gao Xiqing, former deputy chairman at the National Council for Social Security Fund, will be general manager, according to information disclosed at an opening ceremony in Beijing at the weekend.
China set up Asia's biggest state-owned investment company after surging trade surpluses helped to push the nation's currency reserves to a record US$1.33 trillion. The agency's creation has spurred speculation of a flood of Chinese investments into overseas firms and resources such as oil and metals.
"Such a company is very necessary in the context of China's increasing trade surplus and trade frictions with other countries," said Li Yang, who heads financial research at the Chinese Academy of Social Science in Beijing. "China needs to shift its exports from manufactured goods to capital, and also from the old model of relying on foreign investments for growth."
The new fund made its first investment with the US$3 billion purchase of a stakein Blackstone Group LP in May, sustain-ing a loss as the New York private equity firm's stock dropped 19 per centsince its listing on June 22.
China's Government has not disclosed in detail an investment strategy for the agency, to be funded by a total of 1.55 trillion yuan ($273 billion) special government bond sales that will be used to buy foreign-exchange reserves from the central bank.
By Saturday, 700 billion yuan had been raised by 10-year and 15-year bonds issues. More long-term bonds will be sold by the end of the year to meet the budget.
The company might also help major state-owned companies to expand overseas, the Shanghai Securities News reported.
The sovereign fund should be cautious in the beginning and put safety before seeking high returns, said Li Yang at the Social Science Academy, who had been an invited adviser for the setting-up of the company.
"The two agencies charged with investing China's currency reserves need to co-ordinate to prevent potential conflicts," Li said.
China has been partly outsourcing its reserves investments since 1998 to international investment firms, and will continue to do so, according to Li.
The State Administration of Foreign Exchange, a regulatory branch under the central bank, is still managing most of the nation's foreign currency reserves, which are largely invested in low-risk assets such as US Government debt.
China owns US$405 billion, of foreign-held US Treasuries, second only to Japan.
The reserves management firm's assets will exceed those of Singapore's Temasek Holdings, which had US$107 billion under management in March. Norway runs a US$327 billion global pension fund to preserve the country's oil wealth.
The new company incorporates the former investment arm of the central bank, Central Huijin Investment Co., which holds controlling stakes in the nation's four biggest Chinese banks.
-Bloomberg
