May 2007. China Investment Corporation CIC, China’s $300 billion sovereign-wealth fund, made an immediate splash when it was created in 2007, going on a buying spree that included stakes in Blackstone and Morgan Stanley… amongst other foreign distressed assets. As a matter of record it was Hank Paulson – chief of the treasury during the monkey bush-chenie White House administration – who solicited Lou for the investments in Blackstone and Morgan Stanley.
With the necessary humility Lou obliged – at his peril…
Just four months before the fund was formally launched, it agreed to invest $3 billion in the initial public offering of Blackstone. Shortly afterward, it sank $5 billion into Morgan Stanley. The shares of both firms plummeted.
Although these investments helped Wall Street to extend it’s lease on Life – rather than reassure Chinese leaders - the investments did the opposite.
From International Politics, back to Domestic politics that also set CIC’s initial priorities.
A bit of background here is needed: The Finance Ministry favoured setting up a sovereign wealth fund, while the central bank did not. As part of a compromise, CIC was created asa hubrid and forced to invest $130 billion — two-thirds of its initial capital — into Central Huijin Investment Ltd., a government holding company formed in 2003 to bail out China’s largest banks and solidify government control of them.
Though contrary to the stated goal of investing outside China, the stakes in troubled Chinese banks have been among CIC’s best investments. Without them, CIC’s returns would have looked much weaker.
Still, the fund’s relative success makes it likely that it will soon receive an additional $200 billion, according to reports in the official Chinese finance and economic news. That would give it even greater firepower and speed up the pace of its investments.
CIC cannot invest directly in China - the emerging market’s most dynamic economy – so it follows the way of the serpent. It invests in foreign companies that have majority or substantial operations n China and are likely to benefit from the expected growth curves. But in that, it is similar to a hungry serpent that ends up – biting it’s tail – to fill it’s belly.
Still CIC has also purchased shares of scores of cheap equities in foreign companies that hope to expand in China. CIC recently bought 20 percent of Hong Kong-based GCL-Poly, a maker of polysilicon and wafers used in solar panels sold mostly in China and a couple dozens of other similar investments.
Its $1.9 billion investment in Indonesia’s PT Bumi Resources and its $500 million investment in a Mongolian coal-mining firm also hinge on China’s growth and need for resource consumption.
The CIC leader is Lou Jiwei and is an old friend. He was one of China’s up-and-coming Finance Ministry officials with an open mind. His career was managed for political success and was a party golden boy… due to his out of bounds intelligence. Not just party allegiance. Lou is someone who is a geek and still loves technology and social science and the intersection thereof. We know and cooperate with Lou since 2003 and he has always come through with flying colours and is true to his word. A stellar quality for a Chinese leader and one they are measured by constantly.
And he also did the obligatory few years stint as vice governor of one of the country’s poorest provinces, Guizhou. It was here that Lou, being the real COO, he spent the necessary effort, energy and time; in the development of the provincial economy for the people’s benefit.
Because Lou intimately understands that people matter – he performed well. Profits matter too – but people go first.
As governor, he attended all the local party meetings just as much as he attended the people’s committees and he also made time to show up for the popular soccer games & visits to the all important employers, the chemical plants.
He spent time in economic advising roles, from supporting a company building a plant to helping another fix it’s balance sheet as was contemplating a public offering and managing progress in the provincial infrastructure by motivating local officials about managing road projects properly. He moved ahead projects that were running behind schedules or constructions of public housing that were sub par. All honourable public service tasks – he performed – and done well.
But Lou really card and that showed. He produced results consistently. Not just obedient numbers but real results in the lives of people and progress. “The Chinese Communist Party is facing a lot of pressure,” Lou said back then.
“With the reform and opening up, people know more about the outside world, and if the party doesn’t produce economic results, people will rise up against it.”
A dozen years later, Lou, a computer scientist-turned-economist, is running the world’s most powerful and the fifth in size, sovereign wealth fund much like the province he used to run. That is well. The $300 billion China Investment Corp is well run as long as it’s up to Lou.
CIC is his baby alone now – and there is no other above him to earn or lose the political credit - and more than ever he is being measured by his results.
CIC, created in 2007 to diversify China’s vast foreign exchange holdings, which have been invested largely in low-yielding U.S. Treasury bonds, got off to a rocky start with large, ill-timed investments in Blackstone and Morgan Stanley shortly before the financial crisis. Because of that, Lou, barely hung on to his alternate status on the Communist Party’s large central committee.
Since then, CIC has settled into a cautious, low-profile strategy of spreading its investments among a variety of established funds and companies. Lou has rejected suggestions that CIC is carrying out a national strategy. “What national strategy? Our strategy is long-term risk-adjusted returns,” he said at the Economic forum last October in Beijing.
CIC is under intense public scrutiny, and that public scrutiny is good. It puts lots of pressure on CIC to produce returns, and that’s different from other state-owned enterprises in China, for which financial returns are not the only objective. Yet the essence remains that CIC is less a Sovereign Equity Fund and more a CCP remotely controlled vehicle – albeit with an excellent driver – in charge.
When the fund was created, many analysts feared that it would devour foreign firms. Yet CIC has not sought majority stakes or active management roles, an approach confirmed in the Securities and Exchange Commission filing last week that outlined it’s investments in about the 60 U.S.-listed companies or index funds it has focused on the last three years.
CIC has “a lot of capital and is looking for good companies, global in scope, that can help them deploy capital in areas they think are great areas to invest but in which they don’t have that expertise,” said the beguiling CEO, Paul Hanrahan – chief executive of Virginia-based AES - which late last year agreed to sell a 15% percent stake to CIC for $2.2 billion.
But CIC has made some unpublicized blunders, like investments in Southern Sudan paid up to the Khartoum government which has no control over the liberated territory seeking to establish itself as an independent nation.
Another score of Chinese investments in Africa are similarly reflections of national foreign resource policy rather than rational realistic business decisions and their results reflect that well. One really costly mistake: The Zimbabwean mines. Another: It’s heavy investment in the Russian firm with the famed sub-Arctic natural-gas resources. CIC took the frigid plunge with the guarantees of the dishonest Russian operators - only to discover – that the ownership of the wells and the fields themselves was under dispute.
These unresolved issues and undocumented losses off the books cannot paint the complete picture. Nor can a clear picture emerge when you look at the mix of portfolio investments.
The fund is an odd private-public mixture. It receives about 100 business proposals a day, yet because of its early missteps, investments of more than $1 billion generally require the notification of senior Chinese leaders outside the fund. CIC relies heavily on experienced professionals on leave from the lucrative private sector, yet its in-house professionals are paid on par with financial industry standards of China’s state owned banks.
CIC operates more like a government agency than a private enterprise.
The fund was established with $200 billion when China was accumulating $1 billion a day in foreign exchange reserves and seeking returns greater than the 4 percent or so it obtained from U.S. Treasury bonds.
Today all the party elders are looking to raid the kitty.
How much have things changed…
with the times.
Yours,
Pano
PS:
And how much they remain the same.
