Huijin and Jianyin Bolster CIC

Ashby Monk

Michael McCormack of Z-Ben just sent me his analysis of the CIC’s remarkable performance in 2008. In the article, McCormack notes (as we did) that:

“The 6.8% overall gain…is attributable to the success of CIC’s domestic subsidiaries, Central Huijin and China Jianyin, which combined to produce the single largest line item in the income statement, “income from long-term equity investments” of USD26.3bn.”

Remarkably, the above figure may actually understate things:

“USD26.3bn is likely a conservative underestimate of the subsidiaries’ contribution to CIC’s real financial strength; Huijin and Jianyin are likely to be the sources of some of the most attractive securities company and asset management partnership opportunities of the next five years; overseas securities and asset managers hoping to be those partners likely need to make themselves known to Huijin and Jianyin now, even though the date of any eventual transaction may be distant.”

As readers are likely aware, both Huijin and Jianyin were given to the CIC as part of its initial endowment. The two firms were initially tasked with reforming or reorganizing China’s financial services firms. The reorganizations have gone extremely well:

“As they emerge from restructuring, the quality of Huijin and Jianyin’s holdings is, with few exceptions, high.”

Significantly, the outperformance of these domestic oriented funds has important implications for the CIC:

“First, it can expect further income gains from its subsidiaries over the next five years (larger ones as the disposal / IPO schedule accelerates). Second, it will receive additional cash that can be invested abroad. We suspect that as much as a third of that USD26.3bn taken as income is now waiting to be invested by CIC, with the rest tied up in Huijin and Jianyin’s subsidiary firms or waiting to be injected there. Third, the continuing availability of this income cushion will make CIC more willing to take risks abroad.”

These are all interesting implications. Thanks to Michael McCormack for sharing his analysis.

1 Response to “Huijin and Jianyin Bolster CIC”

  1. 1 rien huizer September 15, 2009 at 7:30 am

    Disagree with Michael here: Huijin at the least will need to add capital to its banking interests (as Michael Pettis observed as well) because of: fast growing risk assets combined with declining return on assets (wihich could push the capital ratio below regulatory minima), an international agreement (to which China is a partner) to lift capital ratios and an announced intention (CBRC) to reduce Chinese banks reliance on certain forms of non-equity capital. It is not possible to estimate now how much huijin will have to inject into the banks (depends on the balance between growth in risk weighted assets and increase in banks’ book equity plus tier one substitutes) out of its dividend receipts and to what extent it has cash (Huijin’s earnings are mainly non cash, consolidation profits) to inject. So, instead of Hijin contributing to CIC’s international armory, it may be the opposite that CIC picks up the any shortfalls in the “market” portion of future rights issues on the part of Huijin’s banks, whilst Huijin maintains its stakes. Also, consider the implications of another CIC subsidiary having controlling interests in the investment banks that are likely to act as underwriters of bank capital raisings…

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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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