After a few delays, China's new sovereign wealth fund—the China Investment Corporation (CIC)—officially started operations on September 29, 2007. Also, the conversion of the foreign exchange reserves into capital for the CIC may help "sterilize" some of the excess financial liquidity in China that is reportedly contributing to China's recent inflationary pressures. However, China's decision to create the CIC reawakened some concerns about the impact of SWFs on global financial markets and engendered new misgivings about China's involvement in international equity markets. According to one source, the CIC will have three major departments for its investment functions—1. Other people serving on the CIC's board of directors include:
Zhang Hongli, the CIC's Chief Operating Officer (COO) and past vice minister of finance; Fu Ziying, vice minister at the Ministry of Commerce (MOFCOM); Hu Xiaolian, deputy governor of the People's Bank of China (PBOC) and Administrator of SAFE; Li Yong, vice minister of finance; Liu Shiyu, vice governor of the People's Bank of China; Wang Chunzheng, ex-vice chairman of the National Development and Reform Commission (NDRC); Liu Zhongli, currently chair of the Chinese Institute of Certified Public Accountants; Zhang Xiaoqiang, vice chairman of NDRC; and Yu Erniu, the CIC's human resource director. In little over a year, CIC has either purchased or created several subsidiaries and investment companies, including the Central Huijin Investment Corporation (CHIC); China Jianyin Investment Company (CJIC); and Beijing Wonderful Investments, Ltd (BWIL). Then, in August 2008, it was reported that CIC's capital injection into ABC was to be reduced to $20 billion, to free up more funds for overseas investments. The CIC has made several other major direct investments since its establishment. The second major investment took place on December 19, 2007, when the CIC purchased "around 9.9%" of Morgan Stanley, one of the largest U.S. investment banks. The CIC has also reportedly invested some of its capital in money market funds. Some government officials, as well as members of the public, have been critical of the CIC's investment performance. Investment Strategy

Prior to the creation of the CIC, Chinese officials were already making statements indicating that its investment strategy would be to maximize the rate of return on its investments. State Administration of Foreign Exchange

The State Administration of Foreign Exchange, or SAFE, reports directly to China's State Council and the PBOC. Multilateral Responses to SWFs

Misgivings about the potential impact of the CIC and other SWFs on financial markets and local economies are fostering calls for multilateral organizations to develop greater monitoring procedures and regulations of SWF investments. These have included:
Senate Committee on Banking, Housing, and Urban Affairs hearing, "Sovereign Wealth Fund Acquisitions and Other Foreign Government Investments in the U.S.: Assessing the Economic and National Security Implications," November 14, 2007; Joint Economic Committee hearing, "Do Sovereign Wealth Funds Make the U.S. Economy Stronger or Pose National Security Risks?," February 13, 2008; House Financial Services Subcommittee on Domestic and International Monetary Policy, Trade and Technology, and the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises hearing, "Foreign Government Investment in the U.S. Economy and Financial Sector," March 5, 2008; and House Financial Services Subcommittee on Domestic and International Monetary Policy, Trade, and Technology hearing, Sovereign Wealth Funds: New Challenges from a Changing Landscape," September 10, 2008. However, there have been suggestions that the recent changes do not adequately protect the United States from economic risks posed by SWFs. Among the regulatory changes being suggested are:
Requirements that any SWF interested in investing in the United States publicly release audited financial statements that follow international accounting standards on a regular basis; Restrictions on the percentage of a U.S. company an SWF may own—other nations have such limits; for example, Hong Kong authorities have said they may withdraw the authority of Standard Chartered Bank to issue Hong Kong currency if the share of its stock owned by a Singaporean SWF exceeds 20%; Restrictions on the type of investment SWFs may make in U.S. companies—alternatives include restricting SWFs to the purchase of nonvoting shares, banning SWFs from negotiating a seat on the company's board of directors or representation in the company's senior management; and Changes in U.S. tax code—under current U.S. law, the profits of SWFs are generally tax-exempt; it has been suggested that the tax-exemption for SWFs be eliminated or restricted.
China established its major sovereign wealth fund, the China Investment Corporation (CIC) on September 29, 2007—six months after it first announced its intention to create such a fund. Financed with $200 billion in initial capital, the CIC is one of the largest sovereign wealth funds (SWFs) in the world.
The creation of CIC was somewhat controversial in China. Both the People's Bank of China (PBOC) and the Ministry of Finance (MOF) reportedly wanted the CIC under their authority. In the end, the CIC reports directly to China's ruling State Council. However, as part of the interagency struggle, it was decided that the CIC would have to make significant purchases in several state-owned banks, as well as purchase the Central Huijin Investment Corporation (CHIC) from the PBOC.
Although some of the CIC's initial investments were apparently political in nature, the CIC's top management have repeatedly asserted that future investments will be commercially based. The CIC and its subsidiaries have made several investments, including the purchase of 9.9% of the U.S. financial firm, Morgan Stanley, on December 19, 2007. Meanwhile other government-owned entities in China—including the State Administration of Foreign Exchange (SAFE)—have started to act like sovereign wealth funds and have been making sizable overseas investments.
According to top Chinese officials, the CIC was created to improve the rate of return on China's foreign exchange reserves and to prevent the nation's excess financial liquidity from contributing to domestic inflation. Depending on its performance, the CIC may be allocated more of China's growing stock of foreign exchange reserves in the future. However, its first-year results have raised questions about its investment strategy and calls for administrative reforms for CIC.
A number of experts in international finance have expressed some concern about the recent growth in SWFs and China's creation of the CIC. Analysts have cautioned that major shifts in SWF investments could potentially disrupt global financial markets and harm the U.S. economy. Other experts are less concerned about SWFs and the CIC, and welcome their participation in international investment markets. China has responded by maintaining that the CIC will prove to be a source of market stability. China has also stated that it has no intention of using its SWF to disrupt the U.S. economy or global financial markets.
There have been calls for greater oversight and regulation of the activities of SWFs. The International Monetary Fund (IMF), in consultation with many of the leading SWFs, has developed a set of voluntary "Generally Accepted Principles and Practices" (GAPP) for the operation of SWFs. The Organization of Economic Cooperation and Development (OECD) has drafted policy guidelines for countries that are recipients of SWF investments. Some international financial experts have suggested elements to be included in such guidelines, including standards for transparency, governance, and reciprocity. Other experts have suggested that the United States should review its current laws and regulations governing foreign investments in the United States, and possibly implement special procedures or restrictions on proposed investments by SWFs. These include financial reporting requirements, limits on SWF ownership of U.S. companies, restrictions on the types of equity investments SWFs can make in U.S. companies, and special tax provisions for SWFs. This report will be updated as circumstances warrant.