CIC To Be Restructured For USA?

Ashby Monk

News reports abound today that the CIC will be restructured in order to allow for more investment opportunities in the United States. Indeed, the intention would apparently be to undo the CIC’s ‘bank holding company’ label at the US Federal Reserve Bank of New York, which would in turn eliminate the need to register with the Board of Governors of the Federal Reserve System and remove various investment restrictions that constrain all US bank holding companies.

In short, we are meant to believe that the CIC will be restructured – and some suggest Central Huijin may be totally spun off – just to allow the CIC to increase some of its investment options in the United States. Really? I could be wrong, but my gut tells me that this has as much to do with domestic turf battles in China than anything to do with US regulations governing bank holding companies.

Anyway, we don’t have many details about this potential restructuring yet. But smarter people than me with knowledge of the situation tell me that this restructuring is more likely to happen than not. So, we can start to tease out some implications:

  1. This restructuring will remove roughly $70 billion worth of assets from the CIC.
  2. It will also eliminate a hugely important dividend stream for the Chinese SWF.
  3. Still, some see this as a potential victory for the CIC. Indeed, according to the FT today: “If CIC does receive payment in return for the shares, the fund will nearly double overnight the amount of liquid cash on hand for investing.”
  4. Finally, a friend of mine thinks that a restructured CIC will wind up under the purview of the PBoC/SAFE (instead of reporting directly to the State Council).

But all that’s just speculation. We’ll have to wait and see if, how, when and —  in particular — why the CIC may be broken up.

8 Responses to “CIC To Be Restructured For USA?”


  1. 1 Andrew Rozanov July 6, 2010 at 8:18 pm

    Ashby,

    Both arguments – internal political and departmental competition in China and removing unnecessary constraints on US investments – sound plausible. But aren’t we overlooking another potentially important set of issues here?

    Consider this news: http://www.reuters.com/article/idUSBJC00258820100706

    Chinese banks need to strengthen their equity capital; they raise funds via new equity; if the state doesn’t want to have its control diluted, it must subscribe to the new offerings… If the Reuters story is correct, the proposed solution is quite remarkable: Chinese banks themselves lend the money to the government, so the latter can purchase additional shares in themselves. A win-win situation all around: instead of lending even more to the overextended local industry or property developers, the banks buy safer and nominally more stable government-backed bonds, while the government gets to earn over time a credit spread over its cost of funding.

    The question then becomes: which type of government entity and what type of bond instrument would make most sense in this scenario? Or think of it this way: would local banks buying these bonds be better off if they were linked – directly or indirectly – to CIC and, by extension, its investment performance? And similarly, for a ‘patient capital’ SWF that should seek to invest for the long-term, would this kind of a liability – effectively underwriting at least in part the stability of the local banking system – be desirable? Or would it be a cleaner solution all around if CIC were refocused entirely on long-term overseas investments, funded by liabilities not directly supporting the local banking sector?

    This is just a thought experiment and may not reflect what is actually going on in reality, but think about the confluence of news lately:

    1. Reports CIC may be seeking additional funds
    2. Reports that CIC may be refocusing on short-term performance
    3. Reports that China’s government needs to invest more in bank equity
    4. Reports of possible restructuring of CIC and/or Central

    Best,

    Andrew

    for the long-term,

  2. 2 Rien Huizer July 6, 2010 at 10:34 pm

    Ashby,

    As usual, there are many explanations for something that has yet to happen in China. There are two things that I do not understand in the FT article (usually giving laudatory comments re CIC and playing along with the charade that CIC’s contents fit the SWF label): (1) it appears that the market value of CIC/Huijin’s bank holdings is much greater than the 70 bn the FT expects to be paid to CIC (CIC reports for these stakes on an equity basis, not market value, which is (may be in the case of some unlisted institutions) considerably higher. (2) Without the control over Huijin (which may have been just a formality but may have had some substance), CIC top jobs lose much of their status and access to patronage. In the PRC, having more funds to invest abroad etc does not trump power over the domestic financial system. The PRC way is to avoid such challenges and leave it to others to make mistakes.

    Andrew,

    Good to mention the round tripping method for raising capital. But that was always a posibility: the state wants to maintain control, but does not want to add liquidity. More than likely, the state will lend to Huijin (or inject capital) and have Huijin top up its stakes, rather than having yet another state bureau, ministry or agency muddying the waters. Abolishing Huijin and putting everything under the MOF directly does not make sense either. Another worry is of course how much fresh capital the banks will need going forward, with new Basle requirements (and much greater scrutiny of funny kinds of capital)and the impact of the imminent slowdown in property development to be followed by NPLs and possibly write downs. And then the question arises, how much the private sector will contribute and how much of a complementary injection by the state is needed. And that injection must be careful not to exceed certain levels, in order to keep the regulatory “separateness” of the underlying banks viable. Is is not easy, but interesting

  3. 3 Andrew Rozanov July 7, 2010 at 7:52 am

    More on this from the Wall Street Journal:

    http://online.wsj.com/article/SB10001424052748703636404575352492893699002.html?mod=googlenews_wsj

    Note the concluding comment: “The buck in this oddly roundabout system eventually stops at the People’s Bank of China.” Which is to say, not with the MOF or CIC…

  4. 4 Ashby Monk July 7, 2010 at 10:29 am

    Thanks, guys, for the comments. Very interesting…

  5. 5 Rien Huizer July 7, 2010 at 10:48 am

    Andrew,

    I guess the buck/yuan does not stop at the PBoC in this case. More like the State Council.


  1. 1 The SWF Soap Opera: Inspired by Actual Events « Oxford SWF Project Trackback on September 9, 2010 at 1:32 pm
  2. 2 An Update On China’s SWFs « Oxford SWF Project Trackback on October 14, 2010 at 10:43 am
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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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