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Sovereign wealth funds can help stabilize global financial system

By Lou Jiwei (chinadaily.com.cn)
Updated: 2009-04-01 16:07

Based on lessons and experience learned from the practice of sovereign wealth funds (SWFs) of other countries, the Chinese government established the CIC in October, 2007. SWFs have existed for over half a century. As a model of sovereign assets management, SWFs have made contributions to the economic growth and prosperity both to their host countries and to the recipient countries. They are long-term investors, seeking long-term returns with controllable risks. Last October, representatives from 26 SWFs and IMF jointly drafted and adopted the Santiago Principles, which encapsulate SWFs' basic features, governance structure and investment policies. Those principles should help to strengthen the stability of global system and further safeguard the open investment environment and free capital flows. CIC participated in the joint drafting process, and is supportive of those principles. Meanwhile, we hope the principles could get positive responses from recipient countries of SWFs investment. We hope recipient countries would treat SWFs in a fair, just, and non-discriminative way, and provide a good investment environment for investors to regain confidence.

SWFs suffered losses in this crisis. Some are in a very difficult situation and trying to re-balance themselves; others have adjusted investment strategies or charters and turned to invest domestically. As the sole Chinese SWF, CIC will adhere to its established mission, continue to make prudent investment and conduct commercial operations. An important reason for our adherence is that China has adequate foreign exchange reserves, and we do not see the need to change our investment purpose and strategy.

CIC is a company specializing in foreign exchange funds investment. Such an operation is strategic and different from the traditional foreign exchange reserve management of the central bank. The mission of CIC is to conduct its operations in a prudent manner, and to maximize returns for the benefit of its shareholders with acceptable risks. Therefore, CIC's operations are commercially orientated and it pursues high economic returns. In terms of risk tolerance, CIC is able to withstand short-term volatility so as to gain higher long-term returns. In its strategic allocation of assets, CIC is more aggressive than traditional central banks, as it invests not only in the traditional equity and fixed income products, but also the alternative assets with relative low-liquidity and high return expectations.

Taking into consideration of the strength of our specialist pool and the large scale of investments, we have formulated our investment strategy, that is, to give priority to portfolio investment in international markets, with majority allocated to the public market products, and the rest to alternative products and direct investment. The investment is mainly made by outsourcing to external fund managers, but in-house investment will be gradually enhanced.

In the past year, the global financial crisis also had impact on the business of a new company such as CIC, especially its investment on overseas financial products. Yet CIC's investment size is relatively limited at this stage. Under the circumstances, we have been trying our best to analyze and understand the trends of global financial markets and macro economy. While allocating long-term strategic assets properly, we have adjusted the annual asset allocation strategy in a timely manner by voluntarily slowing down the pace of investment in stocks and setting a cash-based prudential investment strategy. As a result, we kept a relatively high cash-asset ratio and avoided significant risk and losses. On the whole, CIC had a small book loss on its foreign investments in 2008.

The past year also witnessed our efforts to strengthen the institutional building and improve corporate governance. An investment management model that is consistent with the company's characteristics has taken shape. A comprehensive risk management system has been established and a professional team has been built up. Compared with mature SWFs and other institutional investors, CIC still has many deficiencies to address, such as investment experience, professional skills, ability to manage risk etc, despite of some progress made in last year.

2009 is a very difficult year for the global economy, with massive uncertainties loom large in the macro-economy picture and financial markets. In particular, the balance sheets of financial institutions in the US and European countries are extremely weak, and it is hard to predict what responding policies are in the pipeline. Faced with such a complicated external investment environment, CIC will continue to strengthen strategy research, risk management and institutional development, continue to implement prudential investment policy, allocate various types of assets on the principle of long-term orientation and diversification through dedicating timing, type and location of investment, so as to reduce market risks. Based on the company's asset allocation strategy and its judgment on international economic and financial situation, the company will choose a right time to make investment in open market stocks, fixed-income assets, or alternative products. CIC's investment purpose is to seek financial returns, rather than control the invested company's management or resources. We invest to create win-win situations in which the CIC gains investment returns, the investee prospers and benefits, and the local government welcome such investments by CIC. Recognizing there is still room to improve its management expertise, CIC would like to join hands with our local partners to shoulder risks and strive for common development and long term returns.

The Author is chairman of China Investment Corp (CIC), the country's sovereign wealth fund. The article is his speech note at the Second Annual Roundtable of Sovereign Asset and Reserve Managers in Washington on Feb 18, 2009. The note has been edited.

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