China's Sovereign Wealth Fund

Prepared for Members and Committees of Congress

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 some 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 made several investments, including the purchase of 9.9% of the U.S. financial firm,
Morgan Stanley, on December 19, 2007. Meanwhile other government-owned financial entities in
China—including the State Administration of Foreign Exchange (SAFE)—have started to act like
sovereign wealth funds and have been making sizable overseas investments.
According to top Chinese officials, the CIC was created to improve the rate of return on China’s
$1.7 trillion in foreign exchange reserves and to “sterilize” 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 could potentially 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
disrupt 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. The International Monetary Fund (IMF), in consultation with many of the
leading SWFs, is developing a set of voluntary “Generally Accepted Principles and Practices”
(GAPP) for the operation of SWFs. The Organization of Economic Cooperation and
Development (OECD) is drafting policy guidelines for countries that are recipients of SWF
investments. 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 requirements, limits on SWF
ownership of U.S. companies, restrictions on the types of equity investments SWFs can make in
U.S. companies, and special tax provisions for SWFs.
This report will be updated as circumstances warrant.

Introduc tion ..................................................................................................................................... 1
Administrative Details of the China Investment Corporation.........................................................4
CIC’s Management....................................................................................................................4
CIC’s Working Capital..............................................................................................................5
Investment Activities of China’s Sovereign Wealth Fund...............................................................6
CIC’s Existing Investments.......................................................................................................6
CIC’s Future Investments........................................................................................................10
Investment Strategy..........................................................................................................10
Tr ansparency ..................................................................................................................... 12
Recipr ocity .................................................................................................................... .... 12
Market Stability................................................................................................................14
China’s Quasi-Sovereign Wealth Funds........................................................................................14
State Administration of Foreign Exchange.............................................................................14
State Development and Investment Corporation.....................................................................15
National Social Security Fund................................................................................................16
Implications for China...................................................................................................................16
Implications for Global Financial Markets and the U.S. Economy...............................................18
Multilateral Responses to SWFs...................................................................................................19
IMF’s SWF Project.................................................................................................................20
OECD Guidelines for Recipient Countries.............................................................................22
Congressional Initiatives...............................................................................................................22
Congressional Considerations.......................................................................................................24
Figure 1. CIC’s Major Investments (as of 9/08)..............................................................................7
Table 1. Leading Sovereign Wealth Funds......................................................................................1
Author Contact Information..........................................................................................................26

China announced in March 2007 that it would be creating a sovereign wealth fund (SWF) to 1
invest its accumulated foreign exchange reserves more profitably. In May 2007, China Jianyin
Investment Company, a government agency that was designated to manage any asset purchases
until the SWF was set up, bought a $3 billion nonvoting stake in Blackstone Group, a U.S. private
equity firm. After a few delays, China’s new sovereign wealth fund—the China Investment
Corporation (CIC)—officially started operations on September 29, 2007.
The CIC has proven to be of interest to Congress for several reasons. First, some observers are
concerned that its investment activities might have adverse effects on certain financial markets
and possibly the U.S. economy. Second, its creation signals China’s intention to diversify its
foreign exchange holdings away from U.S. government securities into other forms of investment.
Third, specific proposed investments by the CIC may raise national security concerns. Fourth,
some see the possibility that China could use the CIC as a mechanism to pursue geopolitical
With an initial capital fund of $200 billion, the CIC is a significant new addition to the existing
pool of SWFs (see Table 1). The CIC augments the $2 to $3 trillion under management by SWFs
worldwide. In addition, the SWF provides China with another avenue by which it can invest its 2
growing foreign exchange reserves, which totaled $1.8 trillion as of June 2008. Also, the
conversion of the foreign exchange reserves into capital for the CIC may help “sterilize” some of
the excess financial liquidity in China that is reportedly contributing to China’s recent inflationary 3
Table 1. Leading Sovereign Wealth Funds
Country Fund Size ($ Billion) Year Created
United Arab Emirates Abu Dhabi Investment Authority (ADIA) 500 - 875 1976
Norway Government Pension Fund - Global 375 1990
Singapore Government of Singapore Investment Corporation (GIC) 200 - 330 1981
Saudi Arabia Saudi Arabian Monetary Agency 270 1952
Kuwait Kuwait Investment Authority 213 1953
China China Investment Corporation, Ltd. (CIC) 200 2007

1 According to the U.S. Department of the Treasury, a sovereign wealth fund is a “government investment vehicle
which is funded by foreign exchange assets, and which manages those assets separately from the official reserves of the
monetary authorities.” (U.S. Department of the Treasury, Semiannual Report on International Economic and Exchange
Rate Policies, June 2007.) For more information on sovereign wealth funds in general, see CRS Report RL34336,
Sovereign Wealth Funds: Background and Policy Issues for Congress, by Martin A. Weiss.
2 According to China’s State Administration of Foreign Exchange (SAFE), its foreign exchange reserves as of the end
of June 2008 totaled $1.81 trillion; monthly data are provided on SAFE’s webpage—
3 For more on the possible role of the CIC in solving Chinas excess liquidity problem and inflationary pressures, see
the World Banks Beijing Offices Quarterly Update, September 2007; and Michael Pettis, “China’s Sovereign Wealth
Fund,” September 24, 2007, available at

Country Fund Size ($ Billion) Year Created
Hong Kong Exchange Fund Investment Portfolio 139 1993
Russia Reserve Fund 128 2008
Singapore Temasek Holdings 110 1974
Source: CRS summary of Table in Edwin Truman, “A Blueprint for Sovereign Wealth Fund Best Practices,”
Peterson Institute for International Economics, No. PB08-3, April 2008.
However, China’s decision to create the CIC reawakened some concerns about the impact of
SWFs on global financial markets and engendered new misgivings about China’s involvement in
the international equity markets. David R. Francis, columnist for the Christian Science Monitor,
started his November 26, 2007 article, “Will Sovereign Wealth Funds Rule the World?,” with the 4
words, “Sovereign wealth funds are huge scarily big.” During a November 30, 2007 interview on
National Public Radio’s Morning Edition, Brad Setser of the Council on Foreign Relations stated,
“The rise of sovereign wealth funds represents a shift in power from the U.S. to a group of 5
countries that aren’t transparent, aren’t democracies, and aren’t necessarily U.S. allies.” In June
2007, Clay Lowery, U.S. Treasury’s acting Undersecretary for International Affairs, indicated in
an interview that the rise in government-owned investment funds could cause major changes in 6
global markets and bring about “financial protectionism.”
Although the current value of CIC’s working capital is small when compared to global capital
flows, China could increase the size of CIC to over $1 trillion if it makes more of its foreign
exchange reserves available. The growth potential of CIC may prove important because,
according to Setser, somebody with a working capital of $1 trillion (such as the CIC) would have 7
the ability to push the U.S. economy into a recession.
There are also concerns about how China (and other nations) will invest the capital of their
SWFs. Before the creation of the CIC, China had invested much of its foreign exchange reserves
in U.S. government debt, such a U.S. Treasury bills (T-bills), that were relatively risk-free, but
offered relatively low rates of return on the investment. Kenneth Rogoff, former chief economist
for the International Monetary Fund (IMF), indicated in a recent interview, “Countries like China 8
just don’t need to hold any more T-bills. There’s just no point.” As a result, most analysts expect
the CIC to invest in equities and/or acquisitions in order to obtain higher rates of return on their
investments. One financial expert’s analysis of China’s foreign exchange reserve holdings from 9

2000 to 2007 shows a slight shift away from U.S. dollar denominated assets.

With its current capital stock, the CIC has the theoretical ability to purchase controlling interests
in or acquire major corporations, raising potential national security concerns. According to
financial journalist James Surowiecki, “Were China so inclined, it could buy Ford, G.M.,

4 David R. Francis, “Will Sovereign Wealth Funds Rule the World?, The Christian Science Monitor, November 26,
5 Adam Davidson, “U.S. Watches Nervously as Oil-Rich Nations Invest,” Morning Edition, National Public Radio,
November 30, 2007.
6 David J. Lynch, “U.S.: Secretive Global Funds May Hurt Treasuries Market, USA Today, June 21, 2007.
7 Davidson, op. cit.
8 Lynch, op. cit.
9 Brad Setser, “Has China been diversifying away from the dollar?, RGE Monitor, April 9, 2008.

Volkswagen, and Honda, and still have a little money left over for ice cream.”10 Surowiecki’s
observation was echoed by well-known investor Warren Buffett, who added that the annual U.S.
trade deficit of approximately $700 billion means the United States has to “give away a little part 11
of the country” every year. Buffet continued by auguring that if these trade deficits continue the
United States could wind up as a “sharecropper economy,” in which U.S. citizens largely work 12
for foreign-owned firms. In the opinion of Securities and Exchange Commission Chairman
Christopher Cox, “the fundamental question presented by state-owned public companies and
sovereign wealth funds does not so much concern the advisability of foreign ownership, but 13
rather of government ownership.”
However, others are less apprehensive about the potential impact of SWFs on the global 14
economy. Rogoff thinks the SWFs will do “more good than bad.” Surowiecki maintains that
“some of the worries about the dangers posed by sovereign wealth funds are overstated,” and that 15
the SWFs “will act much like other investors, and focus primarily on the bottom line.” Preston
Keat of the global risk consulting firm Eurasia Group echoes Surowiecki’s assessment, pointing
out, “It’s a context of mutual dependence. Blowing somebody else up does you at least as much 16
financial damage.”
The investment activities of several SWFs—including the CIC—following the outbreak of the
subprime-mortgage crisis in August 2007, lent support the views of Rogoff, Surowiecki and Keat.
Struggling major financial firms have received much needed injections of capital from SWFs. On
December 19, 2007, CIC invested $5 billion in Morgan Stanley not long after the financial firm 17
announced it was writing off $9.4 billion of loss-making mortgage investments. On January 15,

2008, SWFs from Abu Dhabi, Kuwait, Singapore, and South Korea provided a $21 billion 18

infusion of capital to Citigroup and Merrill Lynch. During a period of global market uncertainty, 19
SWFs appeared to be providing a source of stability. However, as the ripple effects of the
financial crisis spread during the summer of 2008, the CIC and other SWFs seemed reluctant to
take on additional ailing financial houses, indicating a possible limit to the willingness of SWFs 20
to play the roles of financial rescuers and suppliers of market stability.

10 James Surowiecki, “Sovereign Wealth World,The New Yorker, November 26, 2007.
Francis, op. cit.
12 Ibid.
13 Christopher Cox,The Role of Government in Markets, Keynote Address and Robert R. Glauber Lecture at the
John F. Kennedy School of Government, October 24, 2007.
14 Ibid.
15 Surowiecki, op. cit.
16 Davidson, op. cit.
17 “China Fund Grabs Big Stake in Morgan Stanley,AFP, December 19, 2007
18 Aaron Kirchfeld, “Sovereign Funds Beat Buffett with Stakes in Citigroup, Merrill,” Bloomberg, January 22, 2008.
19 There are indications that CIC and other Chinese investors have been reluctant to invest in more financial firms
because of the perceived criticism of and discrimination against Chinese investments in U.S. companies. For example,
CITIC Securities cancelled a planned $1 billion investment and joint venture in Bear Stearns on March 14, 2008—the
same day the Federal Reserve announced its plan to bail out the ailing U.S. financial firm. For more details, see Ma
Wenluo, “Crisis and Opportunity in CIC’s ‘Fire Sale’ Acquisitions, China Stakes, March 17, 2008. Similarly, China
Development Bank’s planned investment in Citigroup failed to receive the required government approval in January
2008. For more details, seeSurprise: No CDB Funds for Citi,” China Stakes, January 12, 2008.
20 For example, see Jamil Anderlini and Sundeep Tucker, “China Wearies on Its Long March for Acquisitions,”
Financial Times, September 5, 2008.

The China Investment Corporation, Ltd. (CIC) is a semi-independent, quasi-governmental
investment firm established by the Chinese government to invest a portion of the nation’s foreign 21
exchange reserves. The CIC reports directly to China’s State Council, conferring it with the
equivalent standing of a ministry, and the State Council’s leader, Premier Wen Jiabao. According
to one source, the CIC will have three major departments for its investment functions—1. Central
Huijin Investment Company (CHIC), which will provide capital to domestic financial firms; 2.
China Jianyin Investment, which will manage domestic assets and the disposal of nonperforming 22
loans; and 3. A new department to manage overseas investments.
The investment activities of the CIC is to be directed by an 11-member board of directors. The
chairman of the CIC’s board is Lou Jiwei, China’s former deputy finance minister and former
State Council deputy secretary general. The CIC’s general manager and president is Gao Xiqing,
vice chairman of China’s national pension fund and also one of CIC’s executive directors. Other
people serving in CIC’s top management include:
• Zhang Hongli, another of CIC’s executive directors and vice minister of finance;
• Fu Ziying, assistant minister of commerce;
• Hu Xiaolian, deputy governor of the People’s Bank of China (PBC) and
Administrator of SAFE;
• Li Yong, vice minister of finance;
• Liu Shiyu, deputy governor of the People’s Bank of China ;
• Wang Chunzheng, ex-vice minister of the National Development and Reform
Commission (NDRC);
• Liu Zhongli, former minister of finance; and
• Zhang Xiaoqiang, vice minister of NDRC.23
The final member of the board is to be elected by the company’s employees. Initial reports
indicate the CIC is to have a staff of about 1,000 employees, including 100 to 200 investment 24
specialists. Many of CIC’s workers will come from the absorption of CHIC and China Jianyin
Investment. In the first few months following the formation of the CIC, its chief spokespeople

Chinas State Council is the nations highest executive and administrative body, consisting of Premier Wen Jiabao, four
Vice Premiers, five State Councilors, Secretary General Hua Jianmin, and the heads of Chinas various ministries and
special commissions. There are approximately 50 members of China’s State Council.
22 Pettis, op. cit.
23China’s Trillion-dollar Kitty is Ready, Asia Times, October 2, 2007.
24Chinas Forex Investment Company May Debut this Week,” Xinhua, September 10, 2007.

were Lou Jiwei and Li Yong. More recently, Gao Xiqing has been more prominent, including an
extensive interview on CBS’s “60 Minutes” on April 6, 2008.
There were also reports that CIC was considering hiring several independent financial consultants
to manage its investments. On April 3, 2008, Reuters reported that CIC had signed a deal with
J.C. Flowers & Company, a U.S.-based investment firm, launching a $4 billion private equity 25
investment fund that would focus on investments in U.S. financial assets. Neither CIC nor J.C.
Flowers has confirmed the deal. Since April 2008, however, there have been no additional reports
of CIC hiring independent financial consultants.
The working capital for the CIC is coming indirectly from China’s approximately $1.5 trillion in
foreign exchange reserves. Under a plan approved by the Standing Committee of China’s
National People’s Congress in June 2007, the Ministry of Finance was to issue up to 1.55 trillion
yuan ($200 billion) in special treasury bonds to provide the CIC with capital to purchase foreign
exchange from China’s central bank, the People’s Bank of China (PBoC). The CIC is to be 26
responsible for servicing the newly created debt—at an estimated cost of $40 million per day.
The first tranche of the special treasury bonds—worth 600 billion yuan ($77 billion)—was sold
on August 28, 2007, to the PBoC, using the Agricultural Bank of China (ABC) as an 2728
intermediary. The 10-year bonds had a coupon value of 4.3%. A second tranche of bonds
worth 103 billion yuan ($13 billion) was sold to the Chinese public in mid-September. The
September bonds were a mixture of 10- and 15-year bonds with coupon rates ranging from 4.46% 29
to 4.68%. A third tranche worth 96 billion yuan ($12 billion) was sold to the public during
November and December, again with varying maturation periods of 10 and 15 years, with coupon 30
rates of 4.5%. The remaining 750 billion yuan ($97 billion) was sold to PBoC on December 10, 31
again using the ABC as an intermediary, with 15-year maturations and a coupon rate of 4.45%.
In converting 1.55 trillion yuan of foreign exchange reserves into $200 billion in capital for the
newly created CIC, China limited the amount of new debt issued to the public to 199 billion yuan
($26 billion). Most of the newly issued bonds ended up in the hands of the PBoC, effectively
sterilizing some of the perceived excess liquidity in China’s money markets.

25 George Chen, “China’s CIC to Launch $4 Billion Fund with JC Flowers,” Reuters, April 3, 2008.
26 Cost of debt estimate based on a statement by CIC Chairman Lou.
27 The PBoC cannot directly purchase bonds from China’s Ministry of Finance, so it used the ABC as an intermediary
in the financial transaction.
28 Rachel Ziemba, “How is China Funding the Chinese Investment Corporation (CIC)?” RGE Analysts Economonitor,
December 5, 2007.
29 Ibid.
30 Ibid.
31China Central Bank Takes Up 750 Bln Yuan in T-bonds to Fund CIC, AFX News Limited, December 10, 2007.

The investment objectives of the CIC have been gradually revealed by CIC’s leadership. Just
prior to the creation of China’s sovereign wealth fund, Jesse Wang Jianxi, a member of the CIC’s
preparatory group, stated, “The mission for this company [CIC] is purely investment-return 32
driven.” However, the actual meaning of “purely investment-return driven” is open to
interpretation. In April 2008, Wang, in his new role as CIC’s executive vice president and chief
risk officer, provided a more specific statement of CIC’s investment goals, indicating that the
company was “quite conservative at this time,” seeking a rate of return on its investments of 33
“about mid-one-digit or slightly above one digit.”
A fair amount of information is available about the existing investments of the CIC. However,
because of the manner by which China typically publicizes CIC-related activities, it is often
difficult to obtain specific information about investment transactions. In particular, China
frequently announces planned investments shortly before the financial transaction is to take place
and subsequently mentions in passing that the planned investment has occurred, but rarely reports
on the investment the day the actual transaction happens. While this pattern demonstrates some
relative transparency about CIC activities, it also indicates an apparent reluctance to be
completely forthcoming about the details of the CIC’s investments. Figure 1 provides an
overview of CIC’s current direct and indirect investments as of September 2008, based on
available news reports.

32 Jason Dean and Andrew Batson, Beijing to Take Passive Investment Approach,” Wall Street Journal (Europe),
September 10, 2007.
33 Michael Flaherty and Dominic Whiting,China’s CIC Defends Transparency, Eyes Modest Returns,” Reuters, April
2, 2008.

Figure 1. CIC’s Major Investments (as of 9/08)
Source: CRS research.
The investment options of the CIC are constrained in part by previous commitments made before
the formal start of its operations. On May 20, 2007, China Jianyin Investment Company, a
wholly-owned subsidiary of the Central Huijin Investment Company (CHIC), signed an
agreement to purchase a less than10% stake in Blackstone Group in nonvoting shares worth $3 34
billion. The decision to purchase less than 10% of Blackstone’s shares, and to purchase
nonvoting shares, was apparently not an arbitrary one. According to Blackstone’s CEO and
Chairman Stephen A. Schwarzman, “The deal is ‘purely commercial’ and do [sic] not need the 35
U.S. government approval as the stake is less than 10 percent.” According to executive vice 36
president Wang, CIC will hold onto its Blackstone stock for five to seven years, or longer.
In November 2007, the newly formed CIC assumed responsibility for the assets and liabilities of
the CHIC, which was previously owned by the PBoC. It was reported that the PBoC obtained 37
about 500 billion yuan ($67 billion) in compensation for the CHIC. This transaction utilized
approximately one third of the CIC’s working capital. As a result, the CIC became the parent
company for CHIC and China Jianyin Investment Company, plus owner of $3 billion in
Blackstone Group stock. In addition, CIC indirectly became a major stock holder in China
Construction Bank (CCB) and the Industrial and Commercial Bank of China (ICBC) by way of 38
the investments of CHIC and China Jianyin Investment Company in those two banks.
Also in November 2007, a decision was made that the CIC was to provide capital totaling a
reported $67 billion to two of China’s state-owned banks, the Agricultural Bank of China (ABC)

34China to Invest $3 Bln in Equity Giant Blackstone,” Xinhua, May 21, 2007.
35 Ibid.
36 Shangguan Zhoudong, “CIC May Hold Blackstone Stake for 5 to 7 Years,China Daily, March 6, 2008.
37$200 Billion Investment Firm Starts Operation,” by Xin Zhiming, China Daily, October, 1, 2007.
38 According to CCB’s webpage, the CHIC owns 70.69% of CCB’s shares, including 9.21%
owned by its subsidiary, Central Jianyin Investment Company. According to the ICBC’s webpage, the CHIC owns 35.33% of ICBC’s shares.

and the China Development Bank (CDB).39 After its investment in the ABC, the CIC would 40
supposedly own one-third of the bank with another third owned by China’s Ministry of Finance.
Other sources reported that a financial restructuring plan for the ABC submitted to the State
Council for approval was to be announced in late 2007, and the plan would include $40 billion 41
from the CIC, possibly through the newly acquired CHIC. However, on December 5, 2007, a
representative of the ABC stated that “overseas media reports concerning the bank’s shareholding 42
reforms were false,” but did not indicate which aspects of those reports were incorrect. A news
article in March 2008 cited an ABC spokesman as saying that reports of CIC’s investment in ABC 43
were “not true.” Then, in August 2008, it was reported that CIC’s capital injection into ABC was 44
being reduced to $20 billion, to free up more funds for overseas investments. By inference, the
CIC’s total investments in Chinese banks was being reduced to $47 billion and the transferral of
funds to ABC had not yet taken place.
Some details of the CIC’s investment in the CDB were announced on the final day of 2007.
According to the Chinese press, CIC’s subsidiary, the CHIC, signed an agreement on December 45
31, 2007, to invest $20 billion into the CDB. A separate source reported on January 2, 2008, that
the investment had already occurred and confirmed both the amount of the investment and the use 46
of CHIC to make the investment.
The CIC has reportedly made three other major investments since its establishment. On
November 21, 2007, the CIC announced plans for its first post-inaugural investment—the
purchase of $100 million in shares of Hong Kong’s initial public offering for the new China 47
Railway Group (CRG). China Railway Group is a railway construction company in China, and
reportedly one of the largest construction companies in the world. The Government of Singapore 48
Investment Corporation, another SWF, reportedly also bought shares in CRG.
The second major investment took place on December 19, 2007, when the CIC purchased 49
“around 9.9%” of Morgan Stanley, one of the largest U.S. investment banks. The CIC
investment in Morgan Stanley reportedly amounted to $5 billion. At the time of the investment,
Morgan Stanley stressed that the CIC will have “no special” rights of ownership and no role in

39China Investment Co to Invest a Third of Its 200 Bln USDCautiouslyOfficial,” AFX News Limited, November
7, 2007.
40 Yidi Zhao and Janet Ong,Chinese Banks to get $67 Billion from Sovereign Wealth Fund,” International Herald
Tribune, November 8, 2007.
41Agricultural Bank of China to Announce Financial Restructuring Plan Soon,” AFX News Limited, December 3,
2007, and “Agricultural Bank of China Sets Up Investment Banking Operations,” AFP, December 4, 2007.
42Agricultural Bank of China Denies Shareholding Reform Approval Rumor, Xinhua, December 5, 2007.
43Agricultural Bank of China Says Report on CIC Unit’s Investment Plan Not True,” AFX News, March 2, 2008.
44CIC to Halve Capital Injection, So Have More to Invest Overseas,” China Stakes, August 20, 2008.
45 Xin Zhiming, Huijin to Inject $20b into China Development Bank,” China Daily, December 31, 2007.
46China Investment Corp Injects $20 Bln in CDB, China Business News, January 2, 2008
Jamil Anderlini, “CIC to Buy Stake in HK Rail Group Float,” The Financial Times, November 21, 2007.
48 “CIC Invests in China Railway IPO,China Economic Review, November 21, 2007.
49 “China Fund Grabs Big Stake in Morgan Stanley,AFP, December 19, 2007.

corporate management.50 The third major CIC investment occurred on March 24, 2008, when 51
China’s SWF invested “more than $100 million” in Visa’s initial public offering (IPO).
There were unconfirmed reports that CIC was a party to the negotiations to rescue Lehman
Brothers from bankruptcy in mid-September 2008. A group headed by Bank of America and
including J.C. Flowers and CIC supposedly expressed an interest in buying Lehman Brothers, but 52
the possible takeover talks proved unsuccessful.
CIC’s newly acquired subsidiary, the CHIC, also has been making investments. In addition to its
investment in CDB, the CHIC announced on November 8, 2007, it intended to purchase a 70.92%
stake in China Everbright Bank, a Beijing-based joint-equity commercial bank founded in August 53

1992. On November 28, 2007, the shareholders of China Everbright Bank agreed to accept a 20 54

billion yuan ($2.7 billion) capital injection from the CHIC. The CHIC’s financial support to
China Everbright Bank reportedly will be sufficient for it to go ahead with its planned initial
public offering (IPO) on the Hong Kong Stock Exchange (HKSE) and China’s A-share stock 55
market. On December 5, 2007, China Everbright Bank announced that it is planning on holding 56
its IPO in June or July of 2008. As of mid-September 2008, China Everbright Bank’s IPO had
not occurred.
Overall, the reported existing direct and indirect investments of the CIC total leave about $90
billion available for future investments. So far, most of CIC’s investments have apparently been
made based on non-commercial criteria. For example, there are indications that the State Council,
the PBoC and the NDRC insisted that the CIC provide help in the restructuring of these two state-57
owned banks as a condition of the CIC’s establishment. Similarly, the payment to the PBoC for
the CIC’s acquisition of CHIC and its subsidiary, China Jianyin Investment Company, may have
been driven more by political considerations than economic ones. The non-commercial character
of the CIC’s existing investments may lead to increased interest and surveillance on its future
Another factor that may subject the CIC to greater scrutiny is the poor performance record of its
major overseas investments. Since CIC or its subsidiaries purchased equity positions in
Blackstone and Morgan Stanley, the share prices of those companies have fallen 50% and 34% 58
respectively. Some government officials as well as members of the public have been critical of
the CIC’s investment performance.

50 Ibid.
51 “China Wealth Fund Invests $100 Mln in Visa IPO,Reuters, March 24, 2008.
52NY Meeting to Prop Up Lehman Brothers: CIC a Possible Buyer? China Stakes, September 14, 2008.
Mao Lijun,Central Huijin Bails Out Everbright Bank,” China Daily, November 8, 2007.
54China Everbright Agrees to Capital Injection Plan,” China Daily, November 28, 2007.
56China Everbright Bank Reportedly Plans IPO Next Summer,” Xinhua, December 5, 2007.
57 Pettis, op cit.
58 Stock price comparison based on prices on reported day of purchase and on September 15, 2008.

Since the day China announced the formation of the CIC, senior representatives of the new
corporation and various government agencies have been actively publicizing that China’s SWF
would operate with a high degree of transparency utilizing an investment strategy based on
commercial principles. China has also shown some sensitivity to existing apprehensions about the
possible overseas investments the CIC might make, and CIC representatives have publicly
announced that the new SWF will not invest in certain sensitive sectors and markets. However,
the Chinese government has also made it known that it is concerned about undue criticism or
scrutiny of the CIC, and in particular, is worried that other nations (including the United States)
may try to use the creation of China’s SWF as an opportunity to implement protectionist
measures targeted at the Chinese economy. In sum, China has handled the creation of the CIC in a
fairly common Chinese fashion of combining reassuring statements with veiled warnings.
Prior to the creation of the CIC, Chinese officials were already making statements indicating that
its investment strategy would be to maximize the rate of return on its investments. Jesse Wang, a
member of the CIC’s preparatory group, stated on September 10, 2007, “The mission for this 59
company is purely investment-return driven.” On the day the CIC was created, CIC deputy 60
general manager Yang Qingwei stated, “The company’s principal purpose is to make profits.”
More recently, during his first overseas trip as CIC’s chairman, Lou provided a more nuanced
explanation of the company’s investment strategy, “We will adopt a long-term and prudent
investment principle and a safe, professional portfolio strategy that adapts to market changes, 61
which will put emphasis on a rational match of returns and risks.”
The CIC’s need for relatively high rates of return on their investments is partially being driven by
the manner in which the company has received access to China’s foreign exchange reserves.
According to one of the CIC’s top managers, the company is responsible for servicing the interest
on the 1.55 trillion-yuan of bonds issued by the PBoC (see above). According to CIC Chairman
Lou, the interest cost on the outstanding bonds amounts to 300 million yuan ($40 million) per 62
day. With a minimum return of $40 million per day, the CIC will need to earn at least $14.6
billion per year in profits—or at least 7.3% on its total capital of $200 billion. There was a report
that CIC was late in making its first interest payment to the PBoC, despite the receipt of a 63
dividend payment from Blackstone. However, for its second interest payment, the CIC was able 64
to draw on its dividends from its investments in domestic banks to cover the installment.
Also, as Lou points out, the CIC’s ability to obtain access to more of China’s foreign exchange
reserves will depend on its profitability. There has been some domestic criticism of CIC’s

59 Jason Dean and Andrew Batson, op. cit.
60China’s Trillion-dollar Kitty is Ready, Asian Times, October 2, 2007.
61CIC to be Stable Force in Global Financial Market,” Xinhua, December 11, 2007.
62China’s Sovereign Wealth Fund Seeks to be a Stabilizing Presence in Global Markets,” Xinhua, November 30,
63Chinas Sovereign Wealth Fund in Interest Troubles,” China Stakes, March 5, 2008.
64 Technically, the CIC does not directly pay the interest; China’s Ministry of Finance services the debt and the CIC
reimburses the Ministry. For more details, see “Interest Payments? That’s None of CIC’s Business,China Stakes,
August 28, 2008.

investment in Blackstone, which as of September 15, 2008, was down 50% from its purchase
price. Similarly, CIC’s other major U.S. purchase—Morgan Stanley—was trading about 34% 65
below the lower range of the agreed transaction price. “If I am making losses every day, how 66
can I face asking the government for more money?” asked Lou.
There have also been some indications on the actual types of investments the CIC will be making
and where it will be making investments. A CIC representative reportedly stated that it will focus 67
its international investments on a “portfolio of financial products.” CIC Chairman Lou told a
group of financial experts in Beijing that most of the CIC’s investments would be in publicly 68
traded securities, but that it would also make some direct investments.
Officials with the CIC have indicated that it is considering making investments in Hong Kong
and Taiwan, and it is talking with stock exchange officials in London. The CIC is also expected to
set up branches overseas, but the locations of its overseas branches are still to be determined.
At the same time, China has also been providing reassuring statements about the types of
investments the CIC would not be making. Chinese officials reportedly told German Chancellor
Angela Merkel during her visit to China in August 2007 that the future CIC “had no intention of 69
buying strategic stakes in big western companies.” CIC Chairman Lou has indicated that the 70
CIC will not invest in infrastructure. China’s Vice Minister of Finance Li Yong also dismissed 71
“rumors that China would try to buy out European and American companies in large numbers.”
Vice Minister Li has stated that the CIC would not buy into overseas airlines, telecommunications 72
or oil companies. An unnamed contact at CIC indicated that the SWF also will not make
investments in foreign technology companies as a means of obtaining advanced technology, 73
pointing out, “That’s political, and we don’t do that.”
Despite the reassurances provided by the CIC, some observers are unconvinced that China’s SWF
has a clear investment strategy that is free from political influences. Setser gave a negative
answer to his own rhetorical question, “Does the China Investment Corporation (CIC) have a 74
coherent investment strategy?” According to Setser, “There clearly isn’t a consensus inside 75
China on what the CIC should be doing.” A reporter for the Financial Times mirrored Setser’s
appraisal, writing, “Such a concentration of the country’s wealth in one entity has inevitably

65 In their agreement, CIC and Morgan Stanley set a transaction price range for Morgan Stanley stock of between
$48.07 and $57.684 per share.
66China Wealth Fund Aims for Stability, Openness,” China Daily, October 16, 2007.
67 Xin Zhiming,Chinas State Forex Investment Company Debuts,China Daily, September 29, 2007.
68China’s Sovereign Wealth Fund Seeks to be a Stabilizing Presence in Global Markets,” Xinhua, November 30,
69 Pettis, op. cit.
70China’s Sovereign Wealth Fund Seeks to be a Stabilizing Presence in Global Markets,” Xinhua, November 30,
71 “Investment Fund Announces Strategic Plans,Xinhua, November 9, 2007.
72China Investment Corporation Unveils Investment Plan,” Xinhua, November 7, 2007.
73 Keith Bradsher,$200 Billion to Invest, But in China, The New York Times, November 29, 2007.
74 Brad Setser, “Does the China Investment Corporation (CIC) Have a Coherent Investment Strategy? online blog
#234551, available at
75 Ibid.

drawn intense interest ... from powerful forces within the state bureaucracy. Each of these groups 76
has its own ideas on how the money can best be spent.”
CIC officials and other leading economic figures in China have also been making reassuring
statements about the transparency of the CIC’s operations and management, but often with a
caveat or two. For example, on the day the CIC was launched, Chairman Lou said, “We will
adopt a prudent accounting system ... adhere to commercial lines and improve the transparent 77
[sic] on the condition that company interest will not be jeopardized.” In April 2008, CIC’s Wang
contrasted CIC’s operations to the Government of Singapore Investment Corporation (GIC) 78
indicating that while CIC discloses its investments in the United States, the GIC does not. 79
According to Wang, “CIC is one of the most transparent sovereign funds in the world.”
However, the degree and pace at which China will make the CIC transparent is uncertain. During
a dinner at the mayor of London (England)’s mansion, Lou expanded on his previous statement,
“We will increase transparency without harming the commercial interests of CIC. That is to say, it 80
will be a gradual process... If we are transparent on everything, the wolves will eat us up.”
The creation of the CIC is not being done in isolation from China’s overall policy on inward and
outward capital movements. However, while much of the rest of the world would apparently
prefer that China focus on liberalizing various aspects of its inward capital flow policies, much of
its recent effort has been on laws and regulations governing its outward capital flows. At present,
more foreign direct investments (FDIs) are flowing into China than are flowing out of China. The
combination of China’s net FDI inflows and overall trade surplus is financing the growth of its
foreign exchange reserves.
The Bush administration has been pressuring China to make its stock and bond markets more 81
open to foreign investors, matching the comparative openness of its inward FDI policies.
However, of late, China has been more concerned about increasing the avenues by which it can
redirect more of its domestic foreign exchange holdings towards investments outside of China.

76 Jamil Anderlini, “China Wealth Fund’s Early Coming of Age, Financial Times, December 21, 2007.
77 Xin, op cit..
78 Michael Flaherty and Dominic Whiting,China’s CIC Defends Transparency, Eyes Modest Returns,” Reuters, April
2, 2008.
79 Ibid.
80China Investment Corp Warns Western Governments Against Protectionism,” AFX News Limited, December 10,
81 China does restrict inward FDI in what it considers economic sectors related to national and economic security,
including certain agricultural and fishing industries, selected mining industries, traditional Chinese medicine
processing, nonferrous metal industry, electric machinery manufacturing, postal services, geological surveying, news
agencies, publications industry, and radio and televisions stations and networks. For a complete list ofprohibited
foreign investment industries, seeDecree of the State Development and Reform Commission, the Ministry of
Commerce of the Peoples Republic of China, No. 57,” Department of Foreign Investment, November 22, 2007,
available online at

Some have advocated that China push the United States to make the U.S. financial industry more 82
open to foreign investment. In addition, the Chinese government is gradually introducing
reforms to its outward FDI laws and regulations.
For example, China rolled out a program in April 2006 creating “qualified domestic institutional
investors” (QDIIs) that would allow Chinese nationals to invest in global investment funds 83
offered by the QDIIs. China has already approved a number of QDIIs—Bank of
Communications Schroder, China AMC, China International, China Southern Fund, Fortis
Haitong, Fortune SGAM, Harvest Fund, Yinhua—and reportedly plans on approving more QDIIs
in the future. As part of China’s controls on foreign exchange, each fund is provided a quota
limiting the size of its fund by the State Administration of Foreign Exchange (SAFE). China has
also placed restrictions on the overseas markets in which the funds may invest. It has already
approved Hong Kong and London, and is considering the United States. At the end of September 84

2007, just under $11 billion had been invested in the existing QDIIs. In December 2007, JP 85

Morgan estimated that about $90 billion would be invested in QDIIs by the end of 2008.
However, declines in international stock markets have hurt China’s QDIIs. One estimate placed 86
the total value of China’s QDIIs as of June 2008 at just over $7 billion. The goals of the QDII
program are to offer Chinese investors new options, and to soak up some of China’s excess
liquidity by moving funds overseas.
China’s apparent efforts to improve the reciprocity of its investment policies have been
accompanied by warnings to other nations about using the creation of the CIC and the possible
rise in Chinese overseas investments as an excuse to raise inward investment barriers, especially
on the ground of “national security.” On December 10, 2007, CIC Chairman Lou cautioned
during a dinner at the mayor of London’s mansion, “If an economy will use national security as a
criteria for entry of sovereign wealth funds, we will be reluctant to tap the market because you are 87
not sure what will happen.” Lou continued by stating that “any protectionist backlash” against 88
SWFs could “change the stability and security of global financial markets.”
During the December 2007 Strategic Economic Dialogue (SED) in Beijing, Zhang Xiaoqiang,
Vice Minister of the National Development and Reform Commission, made an apparent indirect
comment on the recently passed Foreign Investment and National Security Act of 2007 (P.L. 110-89

49), “We hope U.S. policies and regulations do not become a barrier for Chinese investors.”

According to Zhang, “Investors both from the U.S. and China have shown a strong desire to
invest in each other, and it’s necessary for both countries to create a sound investment 90
environment for them.” Zhang specifically cited China’s concerns about U.S. use of national

82 Ma Wenluo,China Should Press for Wider Openness to US Financial Industry, China Stakes, April 15, 2008.
83 China has also created aqualified foreign institutional investors” (QFIIs) program that allows foreigners to invest in
Chinese companies via funds offered by the QFIIs. In May 2007, China pledged to increase the limit on QFIIs to $30
billion during the Strategic Economic Dialogue (SED) held in Washington, but did not officially raise the limit until
just before the SED held in Beijing in December 2007.
84Chinas CIC Wins $5 Bln Investment Quota - Paper, Reuters, December 17, 2007.
85 Ibid.
86 Rita Raagas De Ramos,China Equity Funds Under Pressure,” Business Week, August 27, 2008.
87China Investment Corp Warns Western Governments Against Protectionism,” AFX News Limited, December 10,
88 Ibid.
89 Fu Jing, “US Policies May Deter Investors from China,China Daily, December 12, 2007.
90 Ibid.

security as a barrier to Chinese investors, and greater scrutiny and possible discrimination against
China’s state-owned enterprises (SOEs) that wish to invest in the United States.
China has also indicated that they see sovereign wealth funds (like the CIC) being a “stabilizing
force in the international market,” in contrast to hedge funds, which are “a source of market 91
instability.” For example, at a conference in Beijing, CIC Chairman Lou noted that SWFs have
been injecting capital into financial institutions “that suffer from the subprime crisis; they are 92
stabilizing the market. CIC will also do the same thing.”
According to CIC Chairman Lou, “Judging from our investment strategy and scale, we are 93
unlikely to present a major impact on the international market.” As a precaution, China’s Vice
Minister of Finance, Li Yong, has indicated that the CIC’s investments will be made “gradually” 94
and “cautiously.”

In addition to the CIC, China has other government entities that act as quasi-sovereign wealth
funds. The key entities are the State Administration of Foreign Exchange (SAFE), the State
Development and Investment Corporation (SDIC), and the National Social Security Fund
(NSSF). Each of these entities has recently taken actions indicating a greater willingness to invest
The State Administration of Foreign Exchange, or SAFE, reports directly to China’s State Council 95
and the PBoC. Its main function is to manage China’s foreign exchange, including the
maintenance of balance of payments statistics, regulating and monitoring foreign exchange
transactions, and managing China’s foreign exchange reserves. It is in this last capacity that
SAFE has the ability to operate like a SWF.
SAFE generally invests China’s foreign exchange reserves in traditional items, such as U.S.
treasury bonds. According to one source, 70% of SAFE’s assets are in U.S.-dollar denominated 96
bonds. However, there are signs that SAFE is diversifying its investment portfolio. Late in 2007,
SAFE purchased minority stakes of less than 1% in three of Australia’s larger banks—ANZ Bank, 97
Commonwealth Bank of Australia, and National Australia Bank—for $176 million per bank. A

91China Wealth Fund Aims for Stability, Openness,” China Daily, October 16, 2007.
92 Xin Zhiming, “CIC Aims for Overseas, China Daily, November 30, 2007.
93CIC to be Stable Force in Global Financial Market,” Xinhua, December 11, 2007.
94China Investment Co to Invest a Third of its 200 Bln USDCautiouslyOfficial,”AFX News Limited, November
7, 2007.
95 SAFE’s webpage in English is:
96 Leona Chen, “Will China Buy into BHP Billiton? China Stakes, April 13, 2008.
97 Tim Johnston, “Beijing Buys into Australian Banks, International Herald Tribune, January 4, 2008.

spokesman for ANZ Bank indicated that SAFE had stated that SAFE’s share purchase was a 98
“portfolio investment” and “a better way of managing their exposure to the Australian dollar.”
In April 2008, SAFE made two major investments in the petroleum industry. On April 4, 2008,
the Financial Times reported that SAFE had accumulated 1.6% of the French oil company, Total, 99
for $2.8 billion in a series of smaller purchases spread over several months. Eleven days later,
Reuters reported that SAFE had also accumulated “just less than 1%” of the British oil company, 100
BP, through a similar process involving a total investment of approximately $2 billion.
SAFE’s move to diversify its portfolio into equities apparently continued through the summer of

2008. By the end of August 2008, SAFE held less that 1% of shares of over 50 British listed 101

companies, according to one financial reporting service. Among the companies in which SAFE
holds an equity position are: Barclays, British Gas, Cadbury, Drax Group, Royal Bank of 102
Scotland, Tesco, and Wire & Plastic Products Group.
SAFE’s recent forays into overseas equity investments have raised two major issues among
market analysts. First, some people are wondering if SAFE’s overseas investments are a sign of
dissatisfaction among China’s leadership with the performance of CIC, or alternatively, an 103
indication of institutional competition between the PBoC and CIC. There is a report that the 104
leadership of CIC is “furious” about SAFE’s purchases of overseas equities. According to one
analyst, SAFE’s recent investments have blurred the distinction of responsibility between itself 105
and CIC.
Second, there is uncertainty on how to interpret SAFE’s willingness to invest in petroleum
companies, given CIC’s previous assurances that it would not invest in this potentially politically
sensitive industry. Rumors that SAFE may be considering an investment in BHP Billiton have
given a modicum of credence to claims that SAFE is willing to make more politically-charged 106
investments that CIC has forsworn. In November 2007, CIC denied market rumors that it was 107
considering making a bid to buy Rio Tinto to block BHP Billiton’s takeover bid.
The State Development and Investment Corporation (SDIC) was established by the State Council
in May 1995 to function as a government-owned holding company to invest in basic economic 108
infrastructure. According to SDIC’s annual report for 2006, SDIC had 62 wholly-owned

98 Ibid.
99 Richard McGregor, Peggy Hollinger, and Henny Sender, “China Uses Foreign Reserves to Buy 1.6% Stake in
France’s Total,Financial Times, April 4, 2008.
100 “China Takes Stake in BP, Reuters, April 15, 2008.
101Report: SAFE Expands Investments in Britain,” China Daily, September 8, 2008.
102 Ibid.
103 “China Takes Stake in BP, Reuters, April 15, 2008.
104 Alan Wheatley, “Tuft Wars Hobble Chinas Financial Markets, Reuters, April 28, 2008.
105 “SAFE, not CIC, Makes Strategic Move on France’s Total,China Stakes, April 8, 2008
106 Leona Chen, op. cit.
107China Investment Denies Rio Tinto Bid,” Xinhua, November 27, 2007.
108 SDIC’s webpage in English is:

subsidiaries and holding companies with over 50,000 employees, 113.8 billion yuan ($16.3
billion) of total assets, making SDIC’s the largest state-owned investment company in China. Up
until recently, much of SDIC’s investment was in power projects, especially electricity-generation
facilities. SDIC also has investments in port facilities, fertilizer production and financial services.
On March 5, 2008, SDIC announced that it intended to “focus on overseas investment and the 109
financial sector in the next five years.” According to SDIC’s general manager, Wang Huisheng,
the company’s planned overseas investment in 2008 was 7 billion yuan ($1 billion), mostly in 110
infrastructure construction and resources-fueled industries. More recently, however, it seems
the SDIC has been refocused on providing capital to China’s domestic energy companies and to
help in the process of selling off selected state enterprises.
In August 2000, China’s State Council and the Central Committee of the Chinese Communist
Party (CCP) created the National Social Security Fund (NSSF) “as a strategic reserve fund 111
accumulated by the central government to support future social security expenditures.” The
National Council for the Social Security Fund (NCSSF) was also created to manage the NSSF’s
assets. Capital for the NSSF is derived from the proceeds from reduction of state-owned shares,
fiscal outlays, allocations made by the State Council, and returns on NSSF investments. Outlays
for social security purposes are jointly determined with the Ministry of Finance and Ministry of
Labor and Social Security. The NCSSF currently uses a number of external fund managers to
manage the NSSF’s investment decisions. The NSSF had assets worth 516 billion yuan ($73.7 112
billion) as of the end of 2007, including $1.66 billion in overseas investments.
In February 2008, Zheng Bingwen, a scholar at the Chinese Academy of Social Sciences (CASS),
one of China’s premier thinktanks, suggested that China create a fund similar to Norway’s 113
Government Pension Fund. According to Zheng, “CIC has sparked a new round of the China
investment threat theory and a new wave of financial protectionism. We may hear fewer of those
kinds of voices if we set up a sovereign pension fund to make investments in developed 114
countries.” While Zheng’s comments were unclear about the relationship between his proposed
sovereign pension fund and the existing NSSF, he did suggest that the NSSF should increase its 115
overseas investments, with a focus on neighboring nations.

Besides offering a new vehicle for managing its foreign exchange reserves, the CIC is expected to
help China sterilize some of its excess liquidity. In 2007 and 2008, China experienced a major
inflow of foreign exchange due to its merchandise trade surplus and the continuing stream of

109 “China’s SDIC Plans Overseas Investment, Xinhua, March 5, 2008.
110 “SDIC Eyes Overseas Investment, China Business News, March 6, 2008.
111 Quote from NSSF’s webpage:
112 Charlie Zhu and David Lin, “China Needs Sovereign Pension Fund - Govt Scholar,” Reuters, February 28, 2008.
113 Ibid.
114 Ibid.
115 Ibid.

foreign direct investment. If the net inflow of foreign exchange is not “sterilized,” the excess
liquidity in China’s money supply may contribute to domestic inflation or a speculative bubble in 116
China’s domestic asset markets (principally the real estate and stock markets).
Prior to the creation of the CIC, China had been absorbing some of the excess foreign exchange
by issuing government bonds, and then purchasing foreign government debt—much of it U.S. 117
treasury bills—with the accumulated foreign exchange. However, this was generating two
economic forces considered undesirable by the Chinese government. First, to attract the foreign
exchange away from its citizens, China was offering a relatively high rate of return on the
government bonds, raising the cost of “sterilization.” Second, because the rate of return was
relatively high, overseas investors were attracted to the Chinese bonds, fostering an additional
influx of foreign exchange. This influx of so-called “hot money” placed more pressure on China
to appreciate its currency when there were already widespread claims that China’s renminbi was 118
undervalued. Ironically, the expectation that the renminbi would appreciate would tend to foster
the inflow of even more “hot money,” creating a potentially unstable speculative spiral.
In addition, China’s accumulation of U.S. debt in 2007 was not very profitable given the
appreciation of the renminbi (RMB) against the U.S. dollar. The yield on 10-year U.S. treasury
bills fluctuated between 4.5% and 5.0% throughout the year. However, since the beginning of

2007, the RMB has appreciated 6.0% relative to the U.S. dollar. As a result, the effective rate of 119

return on U.S. treasury bills valued in Chinese currency was negative in 2007. When evaluated
in its domestic currency, China lost money on its investments in U.S. government debt in 2007.
The CIC offers a new avenue for the government to utilize the accumulated foreign exchange and
possibly earn a positive rate of return on its investments. The sale of the “special treasury bonds”
places the foreign exchange in the hands of the CIC’s investors, who can then invest the capital in
domestic assets other than real estate or stocks, as well as foreign assets. In theory, this could
reduce upward pressures on China’s real estate and stock prices, lower China’s investments in
U.S. government debt, and generate positive yields on its investments in foreign assets.

116 “Sterilization is a process by which a government absorbs excess foreign exchange in circulation. One common
method is by issuing government debt instruments in exchange for the foreign exchange.
117 For more information on China’s accumulation of U.S. debt, see CRS Report RL34314, China’s Holdings of U.S.
Securities: Implications for the U.S. Economy, by Wayne M. Morrison and Marc Labonte.
118 The name of China’s currency is the “renminbi, or “people’s currency. It is denominated in units calledyuan.
On September 15, 2008, the exchange rate between the renminbi and the U.S. dollar was 6.8475 yuan = $1. For more
information on Chinashot money problems, see CRS Report RS22921, China's "Hot Money" Problems, by Michael
F. Martin and Wayne M. Morrison.
119 For example, on January 1, 2007, the exchange rate was 1 yuan of RMB = 12.82 cents of U.S. dollars. If China had
invested 100 billion yuan in one-year U.S. treasury bills on January 2, 2007, it would have been offered a return of
5.0%. After conversion into U.S. dollars, China would have invested $12.82 billion. At the end of the year, China
would have been paid $13.461 billion by the U.S. Treasury for its investment. However, the exchange rate at the end of
2007 was 1 yuan = 13.59 cents. So, after converting the U.S. dollars back into RMB, China would have received the
equivalent of 99.051 billion yuan for its investment—a loss of 949 million yuan, or a -0.9% return on its investment.

From a macroeconomic perspective, it is unclear how the arrival of the CIC will affect global
financial markets. From a microeconomic perspective, the critical issue will be the types of
investments the CIC makes. Furthermore, the entrance of CIC has invigorated discussion of how
sovereign wealth funds are regulated, and what standards, or codes of procedure guide their
Implicit in the creation of the CIC is a shift in China’s overseas portfolio away from U.S. treasury
debt into other assets. There has been some speculation that China may be considering shifting
most of its $1.5 trillion in reserves to the CIC—if it manages its investments well.
According to some analysts, a shift in China’s portfolio away from U.S. debt could put upward
pressure on U.S. interest rates at a time when the Federal Reserve is trying to lower interest rates 120
to prevent a possible economic recession. With a reported daily trade volume of existing U.S. 121
debt of $600 billion, a large divestment of U.S. treasury holdings by China might also cause
more severe market disruptions. However, there would be little impact on the exchange rate
between the renminbi and the U.S. dollar because China’s policy of keeping the exchange rate 122
within a narrow band.
The arrival of a new investor with over $90 billion to invest is attracting the interest of many
major financial markets around the world. On October 26, 2007, Mayor of London (England)
John Stuttard met with CIC Chairman Lou in China to lobby for the new SWF to set up a branch 123
office in the City of London. On November 22, 2007, Hong Kong’s Chief Executive Donald 124
Tsang met with representatives of the CIC in Beijing for similar discussions. In early December
2007, Lou traveled to London, Paris, and Singapore for additional talks about possible CIC
activity in those financial centers.
However, CIC’s Blackstone Group investment has made some observers wary about the specific
types of investments the new SWF will make. There is concern that China may use the CIC to
secure energy resources or purchase strategic assets for geopolitical purposes. There are also
market apprehensions that the CIC could seek to increase its market share in important industries
via targeted acquisitions or takeovers. Others are concerned that CIC might make investments in
particular companies in order to obtain access to sensitive technology or information. These
various forms of possible strategic investments are fueling the calls for international guidelines
for SWFs, including China’s CIC.

120 For an analysis of the potential impact of a shift in foreign holdings of U.S. debt on the U.S. economy, see CRS
Report RL32462, Foreign Investment in U.S. Securities, by James K. Jackson.
121 Liz Moyer, “Cornering the Bond Market?,Forbes, September 28, 2006.
122 For more information on Chinas exchange rate policy, see CRS Report RL32165, China's Currency: Economic
Issues and Options for U.S. Trade Policy, by Wayne M. Morrison and Marc Labonte.
123 Mao Jilun and Li Weitao, “City of London Woos China Investment Corp,” China Daily, October 26, 2007.
124 Carol Chung and Carrie Chan, “Stock Scheme on Agenda at Tsang Chat with PBOC,” The Hong Kong Standard,
November 22, 2007.

Even if the investments of the CIC remain “purely commercial,” there are already indications that
the global financial markets may be ill-prepared for the introduction of its $70 billion into the
marketplace. Shares in the Hong Kong stock market rose in October 2007 in response to rumors
that the CIC had secretly invested in Hong Kong stocks. There was a similar jump in the Tokyo
stock market following rumors that the CIC was considering investing in undisclosed Japanese 125
companies. Plus, rumors in November 2007 that the CIC was a party to a consortium of
Chinese companies planning to bid on Australia’s mining company, Rio Tinto, led to a one-day

7.5% rise in the share price of Rio Tinto and a 4.5% rise in the share price of its other alleged 126

suitor, BHP Billiton, despite repeated denials by CIC representatives. CIC continues to be
mentioned as a possible party in rumored investments, including stories linking CIC with possible
investments in Australia’s Fortesque Metals Group, Germany’s Dresdner Bank, and Sweden’s 127
Nordea, a major financial services group.
There are also apprehensions about the potential for abuse or corruption created by the greater
proximity SWFs create between governments and the private sector. As the existing investments
of the CIC reveal, there is a growing network of interlinked investments between banks and other
financial firms within China and overseas. Some U.S. financial analysts have expressed concern
that CIC’s investment in Morgan Stanley will provide the U.S. financial firm unfair preferential
access to China’s domestic financial markets. Others are worried that China will place pressure
on overseas financial firms in which it has invested to provide more positive and optimistic
assessments of China’s economic prospects and the financial status of major Chinese companies
courting international investors.

Misgivings about the potential impact of the CIC and other SWFs on financial markets and local
economies are fostering calls for multilateral organizations to develop greater monitoring
procedures and regulations of SWF investments. In June 2007, U.S. Treasury’s Assistant
Secretary for International Affairs, Clay Lowery, called on the IMF and the World Bank to 128
develop guidelines for sovereign wealth funds. Following a meeting of their finance ministers
in October 2007, the G-7 nations asked the IMF, the World Bank, and the Organization for
Economic Cooperation and Development (OECD) to develop a set of “best practices” for SWFs 129
to follow. The IMF has formed the International Working Group of Sovereign Wealth Funds
(IWG) to develop guidelines for SWFs. In addition, the OECD is working on a parallel project to
provide recipient countries with suggested guidelines for handling SWF investments as part of 130
their ongoing “Freedom of Investment” project. Also, individual nations are considering

125Shares Rally on Signs of US Retail Strength,” Reuters, November 27, 2007.
China Investment Denies Involvement in Alleged Rio Tinto Bid,” CNN, November 26, 2007; “China Investment
Denies Rio Tinto Bid,” Xinhua, November 27, 2007.
127CIC, China Shenhua Plan to By 15.85% of Australias Fortesque, China Business News, February 11, 2008;
China Sovereign Fund Denies Report on Dresdner Bank Acquisition,” MarketWatch, March 27, 2008; and “CIC
Interested in Buying Nordea’s Stake,China Business News, March 7, 2008.
128 Lynch, op. cit.
129Statement of G7 Finance Ministers and Central Bank Governors, Washington, October 19, 2007; available online
October-2007.pdf. The G-7 nations are Canada, France, Germany, Great Britain, Italy, Japan, and the United States.
130 For more information on the OECD’s “Freedom of Investment” project, see

implementing laws and regulations governing SWFs. For example, the Indian government is
examining the need for a special investment framework for SWFs because “even a trickle from
these funds could have huge ramifications for the Indian stock markets and the economy on the 131
The IMF has responded to the calls of Lowery and others, initiating “a dialogue among and with 132
SWFs, with the goal of identifying best practices.” In November 2007, the IMF held a
roundtable discussion on SWFs involving representatives of key IMF members (including the
United States) and several major SWFs (including CIC). On February 29, 2008, the IMF released
a “Work Agenda” on SWFs that “set out ways to improve the Fund’s surveillance over the
operations of SWFs” and examines “the issues surrounding the development of a set of best
practices which would provide guidance on how to improve institutional arrangements, 133
organizational structures and risk management, and information dissemination practices.” The
report concludes with recommended “next steps” for the IMF including the establishment of an
international working group of SWFs to meet in April 2008 to began drafting a set of best 134
practices, with the goal of completing the first draft by August 2008. On May 1, 2008, the IMF
announced the formation of the International Working Group of Sovereign Wealth Funds (IWG),
comprised of representatives of 25 IMF member countries, including China and the United 135
States. The OECD and the World Bank will participate as permanent observers to the Working
Initially, Chinese officials and CIC representatives were somewhat critical of the IMF project and
its implicit motivations. In January 2008, deputy administrator for China’s State Administration
of Foreign Exchange (SAFE) Wei Benhua contrasted the financial arrangements of SWFs to those
of hedge funds, stating, “SWFs rarely make investment with leverage, and thus will not cause the 136
imbalance of the international financial system.” Wei went on to say, “The newly-formed CIC,
since its birth, has attracted lots of attention from the international community. A few nations, on
purpose, disseminate the argument of China’s investment threat. The international community
should clearly oppose different forms of investment protectionism and financial 137
protectionism.” In March 2008, CIC executive vice president Wang referred to the G-7 138
proposal as “unfair.” Wang went on to say, “The claim that sovereign wealth funds are causing
threats to state security and economic security is groundless. We don’t need outsiders to come tell

131Government Wakes Up after China Floats $200 Bn Fund,” The Economic Times, November 22, 2007.
132 “Sovereign Wealth Funds—A Work Agenda, International Monetary Fund, February 29, 2008.
133 Ibid.
134 Ibid.
135International Working Group of Sovereign Wealth Funds is Established to Facilitate Work on Voluntary
Principles,” IMF Press Release No. 08/97, May 1, 2008.
136China SWF: We Behave Better than Hedge Funds,” China Stakes, January 9, 2008.
137 Ibid.
138 Victoria Ruan, “China’s Investment Fund Pushes Back, Financial Times, March 7, 2008.

us how we should act.”139 During an interview on CBS’s “60 Minutes,” CIC president Gao said 140
that the proposed IMF guidelines were “stupid” and would lead to “hurt feelings.”
Despite their apparent misgivings about the IMF project, China and the CIC decided to
participate in the IMF’s IWG. In addition to attending the November 2007 roundtable, China also
made public statements supportive of the development of international standards for SWFs.
Minister of Foreign Affairs Yang Jiechi stated that “the good use of SWF according to all
international regulations should benefit all parties involved,” but also noted that “all stakeholders 141
should work together to make the rules.”
On September 2, 2008, following two days of meetings in Santiago, Chile, the IWG announced it
had reached a preliminary agreement on a draft set of voluntary principles and practices for 142
sovereign wealth funds. Although the IWG did not release copies of the “Generally Accepted
Principle and Practices for Sovereign Wealth Funds (GAPP),” it did state its hope that the
document “will promote a clearer understanding of the institutional framework, governance, and
investment operations of SWFs, thereby fostering trust and confidence in the international 143
financial system.” The IWG is to present the GAPP to the IMF’s International Monetary and
Financial Committee (IMFC) meeting, scheduled to be held on October 11, 2008 in Washington,
DC. After the IMFC meeting, the IWG intends to publish the entire GAPP.
Following the IWG’s announcement, the CIC stated that it intended to abide by the GAPP’s 144
provisions. This will probably require some changes in CIC’s relationship with CHIC, as CHIC
engages in some policy activities (such as injected capital into state-owned banks) that violate the
GAPP. However, there had already been earlier in the summer of 2008 some indications of a 145
possible change in the CIC-CHIC relationship, including a possible separation.
Two of the key issues motivating the possible separation are the desire to avoid potential
regulatory problems and a clarification of the roles of CHIC and CIC. The licenses for CCB and
ICBC branches in New York City were reportedly delayed in part because of the combined 146
shareholdings of CIC and CHIC in the two banks. In August 2008, the U.S. Federal Reserve
informed the CIC that it could not subsidize loans for its companies via an ICBC branch in New 147
York City. Also, if the two investment agencies are separated, it is expected that CIC will
remain primarily an investor in overseas assets, while CHIC will become an administrator of
state-owned financial assets—such as ABC, BOC, CCB, CDB, and ICBC.

139 Ibid.
140 Video of Gao’s interview available at60 Minutes webpage:
141China Wants to Help Draft the SWF Investment Rules,” China Stakes, March 13, 2008.
142International Working Group of Sovereign Wealth Funds Reaches a Preliminary Agreement on Draft Set Generally
Accepted Principles and Practices - ‘Santiago Principles,” IWG Press Release No. 08/04, September 2, 2008.
143 Ibid.
144 “CIC Ready to Accept a SWF Code of Conduct,China Stakes, September 3, 2008.
A Simmering CIC-Huijin Separation, China Stakes, July 8, 2008.
146 Ibid.
147 Scott Lanman, “Fed Sets Limits on ICBC Loans to China Fund-Owned Companies,” Bloomberg, September 4,

In April 2008, the OECD’s Investment Committee released its report, “Sovereign Wealth Funds
(SWFs) and Recipient Country Policies,” spelling out principles and policy guidelines for “fair 148
treatment of SWFs.” The report recommends that recipient countries abide by five investment
policy principles: (1) Non-discrimination; (2) Transparency; (3) Progressive liberalization; (4)
“Standstill”; and (5) Unilateral liberalization. The report also contained a list of investment policy
guidelines for recipient countries, including:
• Similar treatment for similarly situated investors;
• Codification and publication of investment laws and regulations;
• Prior notification to changes in investment policies;
• Consultation on possible investment policy changes;
• Procedural fairness and predictability; and
• Disclosure of investment policy actions.
On the issue of “national security” concerns, the OECD Investment Committee recognized that
“each country has a right to determine what is necessary to protect its national security,” but
recommended that in making this determination, countries should keep a “narrow focus” in their
investment restrictions, use appropriate expertise to make national security determinations, tailor
their responses to the specific risks posed by a proposed investment, and block investments only
as a “last resort” when national security-related concerns cannot be eliminated. The OECD
intends to release a final report on guidelines for investment policies for recipient countries by
mid-2009. The final report is to include a list of “best practices,” and “if appropriate, suggestions
for clarifications to existing OECD instruments.”
In addition to developing investment policy principles and guidelines, the OECD is holding 149
regular meetings among its members to conduct peer reviews of their investment policies.
While the group does not have the authority to alter or amend member investment policies, the
presentations are subject to what Ervin referred to as the “red face” test. In response to a question
on the OECD’s understanding of the meaning of “national security,” Ervin indicated that there is
a clear consensus that it included military risks, government procurement and “critical
infrastructure,” but also recognized that each OECD member had to make the determination of
what constituted a risk to national security. Ervin also stated that the OECD thinks that members
should strive to keep their definitions of national security as narrow as possible.

Congress has already taken action regarding the monitoring and regulation of foreign investment
in the United States. The “Foreign Investment and National Security Act of 2007” (P.L. 110-49)
requires that the Committee on Foreign Investment in the United States (CFIUS) investigate any

148 “Sovereign Wealth Funds and Recipient Country Policies, OECD Investment Committee Report, April 4, 2008.
149 Information obtained from an OECD Breakfast Series presentation by Carolyn Ervin, Director for Financial and
Enterprise Affairs, OECD, on April 11, 2008.

foreign investment transaction (including mergers, acquisitions, or takeovers) which results in
“foreign control of any person engaged in interstate commerce in the United States” or if the
transaction would result in foreign control of “critical infrastructure that could impair the national 150
security.” The new law also adds new criteria for CFIUS to use when determining if an
investigation is warranted, including whether the transaction is a “foreign government-controlled 151
transaction.” In addition, P.L. 110-49 increases congressional oversight of CFIUS by requiring
more detailed reports on its operations and the results of its investigations. However, the authority
to suspend or prohibit foreign investments in the United States remains with the President.
Even with the passage of P.L. 110-49, some Members of Congress are concerned that the new law
may not sufficiently protect the United States from the risks posed by the emerging SWFs. In a
February 2008 letter to their fellow Senate Banking Committee members, Chairman Christopher
Dodd and Ranking Member Richard Shelby indicated their willingness to consider appropriate 152
legislation. In an editorial opinion published in the Wall Street Journal, Senator Evan Bayh
wrote, “... China’s drive for economic advantage—including rampant intellectual property theft,
currency manipulation, and subsidies for manufacture and export—raise serious concerns about 153
how sovereign wealth funds might be used.” Senator Bayh also suggests that the CFIUS 10%
review threshold may not be a sufficient standard, and calls for the United States to implement a 154
“passive investment” requirement on SWF investments.
Some commentators maintain that while P.L. 110-49 effectively dealt with the national security
risks posed by foreign investments, it did not adequately mitigate against the economic security
risks. In his November 14, 2007 testimony before Senate Committee on Banking, Housing, and
Urban Affairs, Truman mentioned that “some observers” are concerned about the stability
implications for the U.S. economy and financial systems of SWF investments in “private equity 155
firms, hedge funds, and regulated financial institutions.” There have been suggestions that the
United States should prohibit a SWF from investing in the United States unless its home nation
meets certain criteria, such as those proposed by Truman and Garten.
On September 5, 2007, the House of Representatives passed H.Res. 552 (110th Congress) by a
vote of 401 to 4, which included a reciprocity requirement that “United States financial service
regulators, in assessing whether applications from Chinese financial institutions meet
comprehensive consolidated supervision standards, should consider whether the applications are
for operations and activities in the United States that are currently prohibited for United States
financial institutions in China ...” However, others warn that such restrictions could lead to a
wave of financial protectionism that would cause undue damage to the U.S. economy.

150 For more information about the Foreign Investment and National Security Act of 2007and CFIUS, see CRS Report
RL33388, The Committee on Foreign Investment in the United States (CFIUS), by James K. Jackson.
151 According to Section 2 of P.L. 110-49,The termforeign government-controlled transaction’ means any covered
transaction that could result in the control of any person engaged in interstate commerce in the United States by a
foreign government or an entity controlled by or acting on behalf of a foreign government.”
152 Christopher G. Kelley and Robert J Burns,Sovereign Wealth Funds, Corporate Liquidity Problems, and the
Foreign Investment and National Security Act of 2007,” The Metropolitan Corporate Council, March 2008, page 22.
153 Evan Bayh,Time for Sovereign Wealth Rules,Wall Street Journal, February 13, 2008.
154 Ibid.
155 Edwin M. Truman, “Sovereign Wealth Fund Acquisitions and Other Foreign Government Investments in the United
States: Assessing the Economic and National Security Implications,” Testimony before the Committee on Banking,
Housing, and Urban Affairs, U.S. Senate, November 14, 2007.

Since the creation of the CIC, Congressional committees have held several hearings the SWFs in
general. These include:
• Senate Committee on Banking, Housing, and Urban Affairs hearing, “Sovereign
Wealth Fund Acquisitions and Other Foreign Government Investments in the
U.S.: Assessing the Economic and National Security Implications,” November

14, 2007;

• Joint Economic Committee hearing, “Do Sovereign Wealth Funds Make the U.S.
Economy Stronger or Pose National Security Risks?,” February 13, 2008;
• House Financial Services Subcommittee on Domestic and International Monetary
Policy, Trade and Technology, and the Subcommittee on Capital Markets,
Insurance, and Government Sponsored Enterprises hearing, “Foreign
Government Investment in the U.S. Economy and Financial Sector,” March 5,
2008; and
• House Financial Services Subcommittee on Domestic and International Monetary
Policy, Trade, and Technology hearing, Sovereign Wealth Funds: New
Challenges from a Changing Landscape,” September 10, 2008.
In addition, the U.S.-China Economic and Security Review Commission156 held a hearing, “The
Implications of Sovereign Wealth Fund Investments for National Security,” on February 7, 2008.
On February 27, 2008, Representatives Jim Moran and Tom Davis announced the formation of a 157
“new bipartisan task force to explore sovereign wealth funds (SWF).” According to a press
release from Representative Moran’s office, the SWF task force “will study issues surrounding
SWFs including their potential to affect geopolitics, and the U.S. and international economy.”The
SWF task force includes designated members from the House Ways and Means Committee and
the House Financial Services Committee.

The initial reaction of the Bush administration to the CIC’s creation was generally favorable.
President Bush reportedly said that he was “fine” with foreign investors buying shareholdings in 158
U.S. banks and financial firms. U.S. Treasury Undersecretary for International Affairs David
McCormick commented the investments of SWFs have “largely been long-term, very
commercially focused, and very stable,” but also indicated that more transparency and

156 The Commission was created on October 30, 2000 by the Floyd D. Spence National Defense Authorization Act for
2001 (P.L. 106-398, as amended by P.L. 109-108). The commission is to focus its work and study on eight areas:
proliferation practices, economic transfers, energy, U.S. capital markets, regional economic and security impacts, U.S.-
China bilateral programs, WTO compliance, and the implications of restrictions on speech and access to information in
the People’s Republic of China.
157 “Moran Unveils Sovereign Wealth Funds Task Force,” press release, Office of Representative Jim Moran, February
27, 2008.
158 Michael Richardson, “Barriers to Trust: Sovereign Wealth Funds Must Become More Transparent to Avoid Causing
Alarm,South China Morning Post, December 29, 2007.

governance was needed.159 To that end, the Bush administration has been pushing the IMF to 160
develop a system of best practices for SWFs.
As previously mentioned, P.L. 110-49 broadened the investigatory authority of CFIUS in cases of
national security risk, and increased the committee’s reporting requirements to Congress.
However, there have been suggestions that the recent changes do not adequately protect the
United States from economic risks posed by SWFs. These potential economic risks are seen as
including financial market instability, undesirable foreign control or influence over key industries
or companies, access to sensitive technology, and other forms of unfair competitive advantages.
Among the regulatory changes being suggested are:
• Requirements that any SWF interested in investing in the United States publicly
release audited financial statements that follow international accounting
standards on a regular basis;
• Restrictions on the percentage of a U.S. company an SWF may own—other
nations have such limits; for example, Hong Kong may withdraw the authority of
Standard Chartered Bank to issue Hong Kong currency if the share of its stock
owned by a Singaporean SWF exceeds 20%;
• Restrictions on the type of investment SWFs may make in U.S. companies—
alternatives include restricting SWFs to the purchase of nonvoting shares,
banning SWFs from negotiating a seat on the company’s board of directors or
representation in the company’s senior management; and
• Changes in U.S. tax code—under current U.S. law, the profits of SWFs are
generally tax-exempt; it has been suggested that the tax-exemption for SWFs be
eliminated or restricted.
In addition, there have been suggestions that access to U.S. financial markets should be
contingent on the successful conclusion of a reciprocity agreement that would allow U.S. banks
and financial institutions comparable access to the other nation’s investment and financial
However, some commentators are concerned that increasing the regulatory constraints on SWFs 161
will precipitate a period of global financial protectionism. In addition, China might respond to
additional restrictions on Chinese investments in the United States by restricting U.S. companies’
access to China’s financial markets. The issue is whether the value of protection obtained
outweighs the forgone benefits of investments prevented in more restrictive global and/or Chinese
financial markets.

159 Ibid.
160 Francis, op. cit, and Lynch, op. cit.
161 Truman, op. cit.

Michael F. Martin
Analyst in Asian Trade and Finance, 7-2199