CIC To Invest $50 Billion In 2009?

Ashby Monk

News stories abound this morning about the CIC’s intention to invest 10 times more money in 2009 than it did in 2008. According to CIC President Gao Xiqing, CIC had 90% of its assets in cash at the end of 2008. However, he thinks the crisis has largely abated and ‘deals’ are now to be had.

A quick snoop in CIC’s annual report shows that CIC still managed to invest close to $5 billion in 2008. So, if we believe Gao’s “10 times” comment, we may see the CIC invest close to $50 billion dollars this year. This would be half of its international portfolio (according to these smart guys).

Normally I’d argue that investing this much in such a short time period is a mistake, as it would subject the CIC to considerable market timing risks. The traditional approach is to “dollar cost average” your way into the market by buying in over time.

BUT! These aren’t normal times and the CIC isn’t a normal investor. It was recently freed of all its liabilities, so it can now take some bigger risks than it might have been able to. Also, the market timing risk may be worth taking. Given that we are coming out of a crisis, most equity markets are still trading at large discounts vis-a-vis 2007.

So after playing it safe in a year when playing it safe was brilliant, the CIC may end up investing a huge amount of assets in a year when investing huge amounts of assets is brilliant. Only time will tell.

9 Responses to “CIC To Invest $50 Billion In 2009?”


  1. 1 MMcC August 28, 2009 at 12:55 am

    USD50bn may not be such a stretch: CIC can get from USD5bn to USD30bn+ just by funding the mandates it agreed in early 2008.

  2. 2 rien huizer August 28, 2009 at 5:51 am

    MMcC,

    Agree. CIC as a fund would have plenty of cash already and with the prospects for the US economy improving there will be renewed pressure to deal with the main waste-product of national economic policy: dollars. SAFE does not have to shrink to make CIC grow. But it is far more interesting to see what will happen with CIC as the bank holding company, receiving dividends (3 billion from BoChina alone, I would expect Huijin’s dividend receipts to be close to USD 10 bn (close to the 5% dividend that CIC will pay?) and having plenty of cash to inject fresh capital into Huijin should that be necessary to accommodate bank balance sheet growth in excess of internal capital generation.

    The introduction of a dividend requirement for SOEs may well be part of an attempt to mimic the effect of a capital market (skimming off excess cash before managers get to do opportunistic things, perhaps with a little sweetener for managers in their bonus structure), and using a professionally staffed fund, (CIC2?)under SASAC to allocate that surplus cash to other SOEs would fit into that idea as well. Despite the rivers of money resulting from the stimulus package, the Centre will want to make budget constraints as hard as possible, which has proven very difficult in previous periods of expansion. Insulating the State Council from company and bank finances via holding companies could do that.

    CIC 1 (in its Huijin and investment banking capacities) and 2 would probably have complementary forms of expertise (financial and industrial respectively) and political provenance. Whether or not they coinvest is less important than that they do not operate as antagonists. If that is the case, having entities like CIC (next to SAFE and the Social Security fund) would make sense. It would also explain what all these bright young people are supposed to be doing.

    That would mean that CIC1 (and possibly CIC2) would then (in their “fund” capacity) be sitting on as yet unallocated cash that can be invested in foreign markets until banks need recapitalization, or (in CIC2s case) there is a need for money to finance, for instance, a consolidation of an industry like steel making). CICs and the businesses that they own/control would then be financially segregated from the state budget. They could also be financially autonomous through their initial capital and the dividend flow from “policy” dividends (from SOEs and SOBs) and portfolio returns from market operations should more than cover dividends to be paid to the state. In addition, probably CIC as the more international arm, might coinvest (and monitor) with Chinese SOEs (SASAC firms) venturing overseas (where its descendants, CBC and China Import-Export Bank) would provide financing. All in all then that would make CIC even less of a sterilization fund. An SWF with Chinese characteristics.

    Would not it be interesting to know a little more about the accounting?

  3. 3 Ashby Monk August 28, 2009 at 3:17 pm

    Thanks, MMcC. Very interesting analysis, Rien. The accoounting is a big issue. But it seems to me you have a pretty good handle on where much of CH’s outperformance came from…and where it will come from next year! Also, where do we stand on CIC2? Is this progressing? This was brought up months ago but seems to have fallen flat. As you suggest above, Rien, it makes sense.

  4. 4 rien huizer August 29, 2009 at 2:08 am

    Ashby,

    This is still based on the early CIC2 stories:

    http://www.reuters.com/article/privateEquityFinancialServicesAndRealEstate/idUSHKG15160720090422?pageNumber=2&virtualBrandChannel=0

    Which you will have seen earlier. From a state governance perspective, keeping in mind lessons learned in the past in China and in market experiments in the former Comecon, having Huijin-like creatures with a priori limited (large enough) funds can insulate the state as a financial entity from the “soft budget syndrome”.

    If one believes in the following economic priorities for the Chinese gvt : (1) enough growth to ensure social stability (2) industrial efficiency in state firms not less than in “market” firms (i e no soft budget constraints) (3) maintenance of control, i.e. “capitalism” not letting undermine the power monopoly of the CPC, then having an industrial version of Huijin makes sense, and such an entity needs to be capitalized above immediate needs, yet create a “limited liability” status for the gvt as a legal entity and a feasibly distinct role for the gvt (or a separate agency) as regulator wherever such a role is required. In that vision CIC is a vehicle that invests the surplus capital of Huijin, for an undetermined period. The industrial sector is behind the financial sector. I guess the questions re CIC2 are: will the barons in the SOE submit to a limited liability situation (the banks have) and is the experiment with CIC-Huijin successful. A third question might be, could a sister Huijin under CIC2 do the same job better/ But I guess that would not be desirable for a variety of reasons.

  5. 5 rien huizer August 29, 2009 at 3:22 am

    Sorry, I meant of course ” could a sisterHuijin under CIC1 do the same job better” in the lsat sentence.

  6. 6 Ashby Monk August 31, 2009 at 3:00 pm

    Thanks, Rien, for the clarification. I’m really interested to see what happens here. I was interested to see today Lou Jiwei make note of a potential new influx of capital into the CIC…

  7. 7 MMcC September 1, 2009 at 12:02 am

    CIC2 has gone rather cold as a subject of discussion here, although that may only mean that SASAC got what it needed by having the idea floated and has nothing else to say right now. In my view (and it’s not necessarily an informed view – I stick to my financial sector knitting), SASAC may find it more difficult to present a business case for packaging holdings into a SWF-like structure than MoF did with Huijin, simply because SASAC exists to do a Huijin-like job. Offloading companies into CIC2 looks a bit more like paper shuffling (and abnegation of responsibility) for SASAC than it did for MoF, which could more legitimately claim conflicts of interest and responsibility.

    CIC2 might still happen, it’s just not as clear to me why, when or how.

  8. 8 Ashby Monk September 1, 2009 at 12:54 pm

    MMcC: I’m glad you mentioned that. SASAC is already responsible for managing China’s SOEs! So CIC2 does seem a bit redundant. However, maybe a CIC2 would facilitate the firewall that we see at CIC1, which in turn would allow for a more commercial orientation than SASAC could have?


  1. 1 Five Stories to Remember from 2009 « Oxford SWF Project Trackback on December 22, 2009 at 3:37 pm

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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