China Investment Corporation: Threat or Opportunity?

China Investment Corporation
Threat or Opportunity?

by Michael H. Cognato
July 1, 2008

This paper draws heavily on indepth portraits of China’s financial and political systems by a range of noted China experts in order to place CIC in the proper context.

The emergence of sovereign wealth funds (SWF) has been one of the most prominent features of international finance in the past year. According to International Monetary Fund (IMF) estimates, SWFs worldwide hold between $1.9 and $2.9 trillion in funds and are growing at a rate of $800–900 billion per year. [1] High oil prices and large current account surpluses have allowed middle-income countries in Asia and the Middle East to amass capital, and assert themselves in international financial markets, to an extent unprecedented in modern history.

China Investment Corporation (CIC) has been one of the most prominent of the sovereign wealth funds. Established in September 2007 with $200 billion of China’s then-$1.4 trillion in foreign exchange reserves, the fund drew widespread attention with early, high-profile investments in Blackstone and Morgan Stanley. Because of subsequent rumored involvement in huge outward investments by large state-owned firms, a dearth of information from CIC itself, and the current general fascination with China’s emergence as a global power, CIC has caught the attention of financiers and policymakers alike.

CIC’s motivations and likely behavior are not readily apparent. As a result, policymakers in countries that receive CIC investments have not known how or whether to respond. U.S. politicians have been quick to point to the growth and investment of foreign SWFs as a symptom of domestic economic problems, and at times as a problem in and of themselves. The fact that most SWFs are operated by nondemocratic governments whose foreign policies sometimes run counter to U.S. interests only heightens U.S. concerns.

Based on an extensive review of publicly available information (such as news reports, CIC officials’ statements, and industry reports) this essay attempts to assemble a fuller picture of CIC, investigate some of the concerns that have emerged, and suggest policy options for the United States and other nations on the receiving end of CIC’s investments. Though the preponderance of sources are in English, Chinese-language sources have been consulted where necessary. This paper also draws heavily on indepth portraits of China’s financial and political systems by a range of noted China experts in order to place CIC in the proper context.

The first section examines the establishment and financing of CIC, the fund’s management, and its investment decisions thus far. The choices made in the fund’s establishment and the method by which it was funded suggest that CIC is intended to do little more than…

[1] International Monetary Fund (IMF), Global Financial Stability Report (Washington, D.C.: IMF), 45.