CIC needs to open up about its past slip-ups

By Liu Tian Source:Global Times Published: 2015-3-31 18:53:01

Sovereign wealth fund must embrace transparency as it invests more abroad


Illustration: Chen Xia/GT

China's sovereign wealth fund will be investing more of its resources overseas, the fund's top executive said Friday at the Boao Forum for Asia.

In January, China Investment Corp (CIC) established a subsidiary called CIC Capital for the purpose of making direct investments overseas, said CIC chairman Ding Xuedong.

The CIC's moves usually get a lot of attention due to the company's relationship with the government. Founded in September 2007, CIC is a State-owned enterprise responsible for managing part of China's foreign exchange reserves. Its purpose is to help the government diversify its assets and obtain better returns on China's growing stash of foreign exchange reserves, which reportedly reached $3.8 trillion in 2013, the most in the world. Prior to setting up the CIC, China had most of its foreign exchange reserves in low-yielding US treasury bonds.

In 2013, CIC was ranked the world's fourth largest sovereign wealth fund by total assets, behind the Government Pension Fund of Norway, Abu Dhabi Investment Authority and Saudi Arabian Monetary Agency, according to the US Sovereign Wealth Fund Institute.

It has been reported that the CIC's overseas assets have been growing by 16.6 percent a year on average since 2009. It has also been putting its money into a wider range of investments, such as real estate and infrastructure projects, rather than just stocks and bonds.

Investments in public equities and long-term assets accounted for 40.4 percent and 28.2 percent respectively of CIC's investments at the end of 2013, according to a report from caixin.com last year, citing Liu Fangyu, CIC's spokesman.

According to its own data, CIC earned about 9.3 percent on its overseas investments in 2013, down from 10.6 percent in 2012, according to Reuters.

Although it has been profitable in recent years, the company has faced its share of criticism for losing money early from several investments.

In May 2007, CIC invested $3 billion on a 10 percent stake in The Blackstone Group LP, the US-based investment behemoth. The global financial crisis that soon followed hit Blackstone hard, and CIC took a big loss.

The sovereign wealth fund made a similar mistake in December 2007, when it spent more than $5 billion on convertible bonds issued by the US-based investment bank Morgan Stanley.

More criticism came in 2014, after the National Audit Office (NAO) released a report in June that pointed out CIC has taken - and would possibly continue to take - large losses due to the lack of standardization in its overseas investments, irregularities in its domestic institutions and weaknesses in its financial management.

Specifically, the NAO stated that CIC has taken losses, some of which remain hidden, on 12 investments it made from 2008 to 2013. The NAO report listed some of the reasons for the losses, including administrative staff's breach of duty, poor due diligence and  inadequate follow-up management.

The NAO also revealed that CIC subsidiaries had invested 8.28 billion yuan ($1.33 billion) in real estate developments by March 2013, which is illegal. Other irregularities involve illegal transfers of shares, illegal issuance of trust products and groundless payment of intermediary fees.

The public has criticized CIC for its irresponsibility and opaque management because it has made one investment mistake after another. As China's sole sovereign wealth fund, it is the CIC's responsibility to preserve China's foreign assets and increase their value.

Instead, it made numerous failed investments overseas without even the most cursory of explanations.

CIC needs to be more transparent. It needs to be less taciturn and more open about the details of its investments.

Of course, it is necessary for CIC to keep some information secret, but full disclosure of its corporate governance and investment portfolio is essential for the public to supervise the use of State assets. Internationally, about half of the world's 50 largest sovereign investment funds had a higher transparency than CIC in 2014, according to the Sovereign Wealth Fund Institute.

It is also urgent for CIC to establish an effective accountability mechanism - meaning clear rights and liabilities, distinct rewards and punishments - so to curb arbitrariness, strengthen responsibility and improve profitability when its employees make investments. Executives need to be held responsible for major mistakes.

CIC is playing an increasingly important role in managing China's quickly growing foreign exchange reserves, and will inevitably face greater risks and challenges as it invests more overseas. What can guarantee CIC success and add more value to State assets is modest transparency, excellent professionals and highly efficient operations.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn

 

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