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China Investment Corporation: Recent Developments in Performance, Strategy, and Governance

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China Investment Corporation: Recent Developments in Performance, Strategy, and Governance U.S.-China Economic and Security Review Commission June 13, 2013 China Investment Corporation: Recent Developments in Performance, Strategy, and Governance By Iacob N. Koch-Weser USCC Policy Analyst, Economics and Trade Owen D. Haacke USCC Research Fellow Disclaimer: This paper is the product of professional research performed by staff of the U.S.-China Economic and Security Review Commission, and was prepared at the request of the Commission to support its deliberations. Posting of the report to the Commission’s website is intended to promote greater public understanding of the issues addressed by the Commission in its ongoing assessment of U.S.- China economic relations and their implications for U.S. security, as mandated by Public Law 106-398 and Public Law 108-7. However, the public release of this document does not necessarily imply an endorsement by the Commission, any individual Commissioner, or the Commission’s other professional staff, of the views or conclusions expressed in this staff research report. Table of Contents List of Tables and Figures .................................................................................................................................................... 3 Appendix ..................................................................................................................................................................................... 3 Executive Summary ................................................................................................................................................................ 4 Introduction ............................................................................................................................................................................... 6 Section 1: Sovereign Wealth Funds in China’s Economic Policy .......................................................................... 7 China as an Outlier in the SWF Sector ........................................................................................................................ 7 Domestic Factors: Industrial and Monetary Policy ............................................................................................ 10 Section 2: The Funding and Growth of CIC ................................................................................................................. 14 Policy Disputes over CIC ................................................................................................................................................ 14 The Dispute between MOF and the PBOC .......................................................................................................... 14 The Funding Dilemma ................................................................................................................................................ 17 CIC as a Domestic Investor ....................................................................................................................................... 18 CIC’s Commercial Investment Strategy ................................................................................................................... 19 Asset Allocation ............................................................................................................................................................ 19 Asset Management ...................................................................................................................................................... 22 Competition with Other Sovereign Investors ....................................................................................................... 23 Section 3: CIC as a Strategic Investor ............................................................................................................................ 26 Coordinated Investment in Strategic Sectors ....................................................................................................... 26 Oil and Gas ...................................................................................................................................................................... 26 Mining ............................................................................................................................................................................... 27 Utilities and Logistics ................................................................................................................................................. 28 CIC as an Active Investor ............................................................................................................................................... 30 Cooperation with Other SWFs ..................................................................................................................................... 30 Financial Support for Chinese Enterprises ............................................................................................................ 32 Section 4: CIC Governance ................................................................................................................................................. 33 Enhanced Transparency and Accountability ........................................................................................................ 33 Problems with CIC’s Governance ............................................................................................................................... 35 Personnel and Organization .................................................................................................................................... 35 Auditing and Disclosure of Domestic Investment Performance .............................................................. 36 Regulatory Gaps in the International System ....................................................................................................... 37 Section 5: Regulatory Responses in the United States ........................................................................................... 38 CFIUS Exon-Florio Reviews .......................................................................................................................................... 38 Financial Sector Oversight ............................................................................................................................................ 39 Internal Revenue Service Tax Exemptions ............................................................................................................ 42 Conclusion ................................................................................................................................................................................ 43 Appendix ................................................................................................................................................................................... 45 Endnotes ................................................................................................................................................................................... 58 2 List of Tables and Figures Table 1-1: Growth of Sovereign Wealth Funds: Commodity vs. Noncommodity .......................................... 8 Table 2-1: CIC Capital Injections ..................................................................................................................................... 18 Table 2-2: Comparison of Risk Appetite among Major Sovereign Wealth Funds ....................................... 20 Table 2-3: SAFE Investments in the United Kingdom ............................................................................................ 24 Table 2-4: China Development Bank: Assets, Disbursements, and Foreign Currency Loans ................ 24 Table 2-5: China’s Sovereign Investors Working with Major Fund Managers ............................................. 25 Table 3-1: CIC Affiliated Positions in Management ................................................................................................. 30 Table 4-1: Transparency of China’s SWFs (LMTI System) ................................................................................... 37 Figure 1-1: Number of Sovereign Wealth Funds Established by Time Period ............................................... 7 Figure 1-2: Top-Ten Countries by Foreign Exchange Reserves, 2011 .............................................................. 9 Figure 1-3: Sovereign Wealth Funds in China’s Administrative Structure .................................................... 10 Figure 1-4: China’s Growing Deficits in Key Resources ......................................................................................... 11 Figure 1-5: Net Barter Terms of Trade Index, 2001-2011 ................................................................................... 12 Figure 1-6: China’s Inbound and Outbound Foreign Investment ...................................................................... 12 Figure 1-7: Export-to-GDP Ratio, China and the World, 1999-2011 ................................................................ 13 Figure 1-8: China’s Current Account Surplus and Foreign Exchange Reserves, 2001-2012 ................. 14 Figure 2-1: CIC Total Asset Distribution ($ billions) ............................................................................................... 16 Figure 2-2: CIC Global Investment Portfolio Annual Returns vs. Total Income .........................................
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