Twofish's Blog

May 1, 2008

Notes on the China Investment Corporation

Filed under: china — Tags: , — twofish @ 2:46 am

HZ: The pension funds/social security funds should instead be required to hold a percentage of their assets in foreign assets and be required to only invest through broadly diversified index.

The problem is that once you get over $30 billion in assets index investing no longer works, since you just have too much cash, and you’ll move the index against you. The other problem is which index, and who decides what stocks are in your index? Whoever decides what is in the index has become your fund manager.

HZ: CIC, on the other hand, should be strategic investors not financial investors.

China only allocated fraction of its foreign exchange reserves to CIC, and can easily start another investment fund if CIC is successful. The reason that China started with CIC first is several-fold:

1) it’s a pressing need. Shanghai had just had a major scandal in which city pension money was pilfered and everyone knows that the PRC pension system is broke. Hu Jintao came to office on a “Great Society” platform so fixing the pension system is very high on their priority list,

2) there are lots of people in the world that you can hire to manage a pension fund. There aren’t that many people who you can hire off the street to manage a national strategic investment fund.

3) If you have a pension fund, the people that you hire to manage the fund don’t have to be Chinese, and there are good reasons to hire lots of non-Chinese. In you have a fund whose goal is strategic investment to advance Chinese national security interests, then the people you hire pretty much have to be Chinese, and that means that you can’t tap into global expertise, and you run into local political issues.

4) the goals of managing a pension fund are pretty clear (keep old people from rioting), and so you have more investment discipline and fewer bureaucratic battles

HZ: What CIC could do is to provide a transparent lower rate and stable debt financing to companies engaged in agriculture, mining and energy industries. As only a debt investor, it would disavow of control of where the end products should go.

That’s actually what China Development Bank was supposed to do, but CDB hates this job because by having low interest loans, CDB doesn’t make any money and gets saddled with bad loans it doesn’t want. I wouldn’t be surprised if in the next five years, the PRC forms a development bank which combines the Agricultural Development Bank and some other institutions. However, that will involve looking over CIC’s track record and it’s mistakes.

One step at a time…


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