China Seeks to Actively Invest Foreign Exchange
Reserves
Eiichi Sekine

I.

China Investment Corporation to be established

Moves by China to establish a company to invest its foreign exchange reserves
have attracted the attention of capital market participants both in and outside of China.
Following debate at the Central Financial Work Commission convened by the party's
Central Committee and State Council (equivalent to Japan's Cabinet Office) in
January 2007, Premier Wen Jiabo, speaking at a press conference for the National
People's Congress (equivalent to the Diet) in March 2007, formally announced that a
new entity would be established to invest China' foreign exchange reserves.
Around the time of the formal announcement, a group1 to study the investment offoreign reserves was established and headed by Lou Jiwei, who had just beenpromoted from Deputy Minister at the Ministry of Finance to Deputy SecretaryGeneral of the State Council. With the aim of establishing a new entity, this study
group held its first meeting in March 2007, and then a second meeting in May, todiscuss such issues as the new entity's legal and policy status, how it would becapitalized, its corporate governance, investment model, and relationship with Central
Huijin Investment Company Ltd. (described later), as well as regulatory issues andproblems related to its personnel scheme. As a result of these deliberations, the study
group submitted a draft proposal to the State Council for the establishment of a newentity, with the idea that the new entity (1) would be established with capital obtained
from foreign exchange reserves via the issuance of special treasury bonds by thecentral government; (2) would inject capital (in the form of an equity investment) into
key state-owned domestic financial institutions, and (3) would also invest directly inoverseas financial instruments to open a channel for raising returns over the long term,so as to ensure that the value of state assets would be maintained and increased. The
proposal was approved by the State Council in August 2007.

1

Comprised of 14 ministry-level agencies, including the Ministry of Finance, the People's
Bank of China, State Administration of Foreign Exchange (SAFE), China Banking
Regulatory Commission (CBRC), China Securities Regulatory Commission (CBRC),
China Insurance Regulatory Commission (CIRC), and the Legislative Affairs Office of theState Council.

46

Nomura Capital Market Review Vol.10 No.4

Although the new entity had not yet been formally established at the time, on 20
May 2007 it was announced that it would invest US$3 billion into Blackstone, a major
US-based private equity group.2 To procure investment funds for the new entity, on 29
June 2007 the 28th session of the Standing Committee of the National People's
Congress approved the issuance by the Ministry of Finance of Rmb1.55 trillion in
yuan-denominated special treasury bonds, and the initial tranche of Rmb600 billion
was issued on 29 August.
Finally, this new entity to invest China's foreign exchange reserves was formallyestablished on 29 September 2007 under the name China Investment Corporation(CIC). Lou Jiwei was named its Chairman of the Board of Directors, Gao Xiqing(formerly vice chairman of the National Social Security Fund) its President, and Hu
Huaibang (formerly Commissioner of Discipline Inspection with the China Banking
Regulatory Commission) its Chairman of the Board of Supervisors (auditor).
Prior to the formal establishment of the CIC at the end of September 2007, the only
information regarding how the new entity would be formed and what activities it
would pursue was noted in the issuance announcement for special treasury bonds
from the Ministry of Finance (Figure 1) 3 . After the CIC's formal establishment,
however, the following information was revealed. First, the CIC is a wholly stateowned company established under the Company Law, capitalized at US$200 billion
through the issuance of Rmb1.55 trillion in special treasury bonds. Second, the CIC
will pursue a variety of investments, primarily in overseas securities, including
equities. Third, it injects capital into domestic financial institutions, fulfills its duties
as an investor representing the state, and achieves valuation gains for state-owned
financial assets. Fourth, by operating independently from the government and oncommercial principles,4 it will aim to maximize earnings on long-term investments
within tolerable risk levels. Even with this explanation, however, it remains difficult
to paint an overall picture of the new entity.
In an attempt to paint such a picture, in the chapters that follow we provide asummary, based on Ministry of Finance press releases and local news reports, of the
CIC's fund procurement methods, investment policies, and governance, all of whichwere the subject of considerable debate and disagreement prior to the CIC's
establishment. We will also forecast the direction we think the CIC is heading.

2

3
4

Announced by Blackstone on 20 May 2007. The CIC, which was still being readied forestablishment by the Chinese government, acquired just under a 10% stake inBlackstone's IPO, and plans to hold it for at least four years. The shares were in the formof non-voting common units. The acquisition price was set at 95.5% of the IPO price. The
announcement created quite a stir, both in regards to the CIC's investment policy andbecause of the timing of the announcement immediately prior to the second US China
Strategic Economic Dialogue. After that, on 10 September 2007, Blackstone agreed to
pay up to US$600 million to acquire 20% stakes in China's state-owned chemical giant
Sinopec Group and its subsidiary, China National BlueStar (Group).
There have been three issues thus far, on 29 June, 5 July, and 29 August 2007.
Specifically by keeping its administrative and corporate functions separate.

China Seeks to Actively Invest Foreign Exchange Reserves

47

Figure 1: Ministry of Finance press releases regarding
the issuance of special treasury bonds
Date

Key points* On 29 June 2007, the Standing Committee of the National People’s Congress approved legislation
proposed by the State Council related to the issuance of special treasury bonds by the Ministry of
Finance, the purchase of foreign currencies, and adjustment of the maximum amount of government
bonds outstanding at end-2007.
* The Ministry of Finance issues Rmb1.55 trillion in special government bonds, purchases foreign
currency reserves, and establishes the CIC as a source of funding.

29 June2007* The significance of the issuance of special treasuries and establishment of the CIC is as follows.
(1) To curtail monetary liquidity and alleviate pressures on the PBC to intervene.
(2) To coordinate fiscal and monetary policy and increase the effectiveness of macroeconomic controls.
(3) To reduce the size of foreign currency reserves and improve investment returns.
(4) To provide assistance to Chinese firms expanding overseas and improve the competitiveness of theChinese economy.
* Special treasury bonds are issued using market methods. These will be tradable registered
government bonds, with a maturity of at least 10 years and the yield at issuance set based on market
interest rates.
* Special treasury bonds shall be issued so as to be neutral relative to the macro economy. Special
treasury bonds are to be held by the PBC and effectively used for open market operations.
* Special treasury bonds satisfy the market's need for investment vehicles. In particular, they will
broaden investment options for insurance companies and the NSSF.
* Unlike regular government bonds, special treasury bonds are not aimed at financing government
deficits.
* The issuance of special treasury bonds is a substitute for the PBC's issuance of commercial bills, andthus whether the entire amount is issued or there is a partial issuance will have no direct impact on theamount of currency supplied to the market.
* Special treasury bonds are not issued directly to the PBC, but effectively increase the PBC's
government bond holdings through certain methods, thereby creating more leeway for open market
operations.

5 July2007* Foreign exchange reserves purchased with the issuance of special treasuries are primarily invested
for the purpose of generating returns.
* Because purchased foreign exchange reserves are invested in stocks and other equity vehicles, they
are no longer considered foreign exchange reserves for which the IMF requires disclosure, and are nolonger counted as foreign exchange reserves.
* The CIC invests in both overseas businesses and portfolio securities in search of returns that are
higher than the issuance yields on special treasury bonds, thereby raising the investment returns offoreign exchange reserves.
* The CIC reports directly to the State Council, and is at a level equivalent to a ministry.
* On 29 August, the Ministry of Finance issued the first Rmb600 billion tranche of special treasuries,
with a maturity of 10 years and a coupon of 4.3%.
* The significance of the issuance of special treasury bonds and the establishment of the CIC is asfollows.
(1) To curtail monetary liquidity and alleviate pressures on the PBC to intervene.
(2) To coordinate fiscal and monetary policy and increase the effectiveness of macroeconomic controls.
(3) To reduce the size of foreign currency reserves and improve investment returns.

* Special treasury bonds amounting to Rmb1.55 trillion are issued in tranches. One reason is to get abetter understanding of the macro economy and financial situation. Another reason, given the market's
29 August lack of government bonds with maturities of 10 years and more, is to achieve a more diverse range of2007
government bond types and term structures by issuing bonds with 10-year, 15-year, and longer
maturities. China's government bond market is primarily made up of intermediate bonds with maturitiesof 3-5 years; there is only a small quantity of short-term bonds with 1-year and less maturity as well asof long-term bonds with maturities of 10 years and higher.
* The 4.3% coupon for the first tranche of special treasuries was determined based on the market
yields of 10-year government bonds and on the characteristics of the special treasuries.
* The Ministry of Finance issued the first tranche to domestic commercial banks and used the yuancollected from that issuance to purchase an equal amount of foreign exchange reserves from the PBC.
At the same time, the PBC used the Rmb600 billion collected from selling the foreign exchange
reserves to purchase the special treasuries from the domestic commercial banks.

Source:48

Nomura Institute of Capital Markets Research, based on materials from the
Ministry of FinanceNomura Capital Market Review Vol.10 No.4

II. Funds procurement through the issuance of special treasury
bonds aimed at absorbing excess liquidity
1. Domestic issuance of yuan-denominated bonds
One topic of debate surrounding the CIC's establishment was its method of
procuring funds. The CIC was established for the dual purposes of reducing the sizeof foreign exchange reserves and increasing investment returns, but simply investing
China's foreign exchange reserves overseas would be insufficient, as it would not doanything to reduce domestic excess liquidity. Accordingly, yuan-denominated bonds
were issued domestically in conjunction with the establishment of the CIC, andforeign exchange reserves equivalent to the excess liquidity absorbed from thisissuance were then invested overseas.
Since it joined the World Trade Organization (WTO) in 2001, China's trade surplus
and fund inflows from overseas have caused rapid growth in its foreign exchange
reserves, which are now the world's highest. The most recent data shows foreignexchange reserves totaling Rmb1.434 trillion at the end of September 2007 (Figure 2).
This rapid growth in foreign reserves has also created a surplus of cash (excess
liquidity) within China's domestic economy, which in turn creates the risk of inflationand investment overheating. China's central bank, the People's Bank of China (PBC),
absorbs yuan-denominated funds from the market by selling its government bondholdings and by issuing central bank bills. The amount of central bank bill issuance,
however, has grown (as of the end of July 2007) to account for 72% of the entire
interbank market, and the limits on the rate at which the PBC can absorb yuanliquidity from the market are starting to become apparent (Figure 3).5

Figure 2: Foreign exchange reserves in recent years(¥ billions)
1,600
1,400
1,200
1,000
800
600
400
200
0

Note:
Source:

5

06

04

02

98
20
00

96

94

92

90

88

86

84

82

80

19
78

-200
(Year)

Newest figures in the graph are as of end-September 2007.
Nomura Institute of Capital Markets Research, based on data from SAFE

For more on the growth in China's foreign exchange reserves and the mechanisms
leading to excess liquidity, see the China Securities Market Handbook 2007 from the
Nomura Institute of Capital Markets Research (in Japanese).

China Seeks to Actively Invest Foreign Exchange Reserves

49

Figure 3: Bill issuance by the PBC(¥ billions)(a) central bank bills(b) total bond issuance(a) / (b)Note:
Source:

2003

2004

2005

2006

2007
Jan-Jul

1997

1998

1999

2000

2001

2002

119
2,085
5.7%

0
6,204
0.0%

0
4,370
0.0%

0
4,416
0.0%

0
5,849
0.0%

1,938
7,227 17,037 27,882 36,574 29,701
9,944 17,647 27,296 41,182 57,096 41,451
19.5% 41.0% 62.4% 67.7% 64.1% 71.7%

Amount of issuance in the interbank bond market
Nomura Institute of Capital Markets Research, based on data from ChinaBond

2. Detailed picture of bond issuance
The amount of special treasury issuance decided on 29 June 2007 was Rmb1.55
trillion, which is equivalent to US$200 billion in foreign exchange reserves.6 Basedon this, the CIC's fund procurement cycle is as follows. (1) The Ministry of Financeissues Rmb1.55 trillion in special treasury bonds, (2) the yuan procured from issuanceis then exchanged for (used to purchase) foreign exchange reserves held by the PBC's
State Administration of Foreign Exchange (SAFE); and (3) the purchased foreign
reserves are then invested overseas. The initial Rmb600 billion issuance on 29 August
2007 was underwritten by the Agricultural Bank of China on the interbank bondmarket, and on the same day the PBC engaged in a buying operation, purchasing theentire Rmb600 billion in special treasuries from the Agricultural Bank of China(Figure 4).

Figure 4: Initial Rmb600 billion tranche of special treasuries(Within China)

China
Agricultural
Bank(1) Special
treasury
issue(3) Special
treasury
sale (entire
amount)Short-termmoneymarkets

Note:
Source:Sale of special
treasuries(PBC operations)

Peoples Bank of
China
(PBC)

(Outside of China)(4) Inject
capitalMinistry of
Finance(MOF)(newlyestablished)
China
Investment
Corporation(CIC)

Portfolio securities(including equity
investments)(2) Use yuan
tobuy foreign
reserves

Issued on 29 August 2007
Nomura Institute of Capital Markets Research, based on materials from the
Ministry of Finance and local media

6

The local media has long estimated the amount of foreign exchange reserves earmarked
for overseas investment at about US$200-300 billion.

50

Nomura Capital Market Review Vol.10 No.4

We note two important features regarding this issuance scheme. First, the special
treasury bonds were issued in tranches to minimize the impact on domestic financial
markets, such as an increase in interest rates. In fact, the Ministry of Finance plans to
issue the remaining Rmb950 billion of special treasuries in separate tranches before
the end of 2007 (Figure 5). Excluding that portion to be directly underwritten by the
Agricultural Bank of China, as was the case for the first and seventh issuances, thespecial treasury bonds will be offered publicly on the interbank bond market, thereby
allowing individuals to purchase them from the banks at retail.
Second, the issuance of special treasuries is being positioned as an open market
operation of Rmb1.55 trillion (equivalent to US$200 billion). The initial issuance wasmade on the interbank market because the PBC is prohibited from directly
underwriting government bonds, necessitating a scheme in which the Agricultural
Bank of China sold directly to the central bank the entire amount of the special
treasury issuance that it received. The special treasuries held by the PBC are meant forlater sale to the market as part of the central bank's open market operations. In fact, on
4 September 2007, the PBC used the special treasury bonds for repo (selling) ops(Rmb10 billion, 182 days, 3.2% yield). With the exception of that portion sold toretail investors through the banks, the second and later special treasury tranches will
also probably be used in the central bank's open market operations.

Figure 5: Planned and actual issuance of special treasuries

Date

Issuance plan
(Rmb bns)

Name

Actualissuance amount(Rmb bns)

Term

Issuanceyield(%)

Auctiondate

Issuance market

August-07

600

First special treasury issue

600

10 years

4.3

8/29/07

Interbank bond market(Agricultural Bank of
China)

30

Second special treasury issue

32

15 years

4.68

9/17/07

30

Third special treasury issue

35

10 years

4.46

9/21/07

32

Fourth special treasury issue

36

15 years

4.55

9/28/07

30

Fifth special treasury issue

35

10 years

4.49

11/2/0730

Sixth special treasury issue

36

15 years

4.69

11/16/07

750

Seventh special treasury issue

750

15 years

4.45

12/4/07

26

Eighth special treasury issue

26

10 years

4.41

12/14/07

September-07

November-07

December-07

Total issuance

Note:
Source:1,528Interbank bond market(individuals can alsopurchase through retailtransactions at banks)Same as above
Interbank bond market(Agricultural Bank of
China)
Interbank bond market(individuals can alsopurchase through retailtransactions at banks)

1,550

Date of the first special treasury auction is the actual date of issuance.
Nomura Institute of Capital Markets Research, based on the Ministry of Financepress release dated 10 September 2007 and other sources

China Seeks to Actively Invest Foreign Exchange Reserves51III. The CIC's investment policies
1. Diversifying the investment of foreign exchange reserves
The bulk of China's foreign reserves are said to be invested in dollar-denominatedassets, primarily US Treasury bonds. This investment of the world's largest foreign
reserves in mostly US dollar denominated assets also creates exposure to the risk ofasset price declines resulting from dollar depreciation. Another risk to be considered isthat if dollar-denominated assets were replaced with assets denominated in othercurrencies, the act of switching itself, depending on the scale and frequency, would
also trigger a decline in the value of the US dollar.
This explains why the Chinese government decided to establish a company
specialized in investing foreign reserves, based on the guiding principle of"strengthening the management of foreign reserves while giving ample consideration
to different channels and methods for investing those reserves" (from the 2006 Reporton China's International Balance of Payments). At the above-noted National People's
Congress held in March 2007, Premier Wen Jiabo stated that (1) China is further
diversifying the investment of its foreign reserves for safety reasons; (2) China will
establish a company to invest its foreign reserves, but this company will have noconnection with governmental ministries or agencies, will invest said reserves inaccordance with national laws and subject to supervision, and will strive to protect
and increase the value of those reserves; and (3) China's establishment of a company
to invest its foreign reserves will have no impact on the market for US dollars.

2. Investment policy and benchmarks
Although it appears that the CIC has considered investing in securities (bonds andstocks), businesses (including real estate and equity stakes), and energy (including thepurchase of strategic materials), for the time being it will diversify its investments
across primarily overseas securities, including equities (Figure 4 again). The Ministryof Finance had initially said that one of the purposes of establishing the CIC was tohelp Chinese firms expand operations overseas and improve their global
competitiveness (Figure 1 again).7
Foreign exchange reserves are primarily meant as (1) funds to be used by monetary
authorities for intervening in foreign exchange markets and (2) a reserve for use when
it becomes difficult to make payments to other countries on foreign currencydenominated loans as a result of a currency crisis or other event.8 Accordingly, not allof China's foreign exchange reserves will be invested through the CIC. Regarding thereasonable levels of foreign exchange reserve required by China, Xia Bin, Director
7

8

52

Assistance to Chinese firms expanding overseas and the enhancement of China's global
competitiveness were listed as objectives of the CIC in the press release dated 29 June
2007, but then dropped in the press release dated 29 August 2007. We surmise that the
government sensed overseas concerns over the use of foreign exchange reserves to help
Chinese firms expand overseas.
From the Bank of Japan website.

Nomura Capital Market Review Vol.10 No.4

General of the Research Institute of Finance within the Development Research Centerof the State Council, estimated that there was a total need for US$700-740 billion,
including (1) US$300 billion for the repayment of foreign debt, (2) US$360 billion tosettle import transactions, and (3) US$80 billion for emergency use. 9 The foreign
reserves of US$200 billion earmarked to fund the issuance of special treasury bonds
back in June 2007 happens to be what is left after subtracting from China's foreignexchange reserves of US$1.0663 trillion at the end of 2006 the US$700-740 billion
considered as reasonable reserves by Director General Xia.10
Ensuring the profitability of the investments is important, but the decision onwhich benchmark to use is also of interest. The initial special treasury issuance of
US$600 billion on 29 August 2007 had a maturity at 10 years and a coupon yield of
4.3%. Taking this as the CIC's basic cost of procuring funds, and assuming also thatthe yuan will appreciate at an annual rate of around 3%, the CIC would need toachieve a minimum yield on its overseas investments of over 7.3%.11 Based on this,
we think it can be surmised that the CIC's investment policy, rather than following asimple plan of starting out with safe assets and gradually shifting into riskier assets, isto take returns into consideration at the outset and look for ways to invest in risk
assets, as well. 12 In fact, the CIC's investment in Blackstone could probably becharacterized as a high-risk, high-return strategy. In addition, investments in emerging
markets (particularly in energy) will probably include some element of economic
assistance from the Chinese government to the developing country.

9

10

11
12

Xia Bin and Chen Daofu, Gaikajunbi Kyuuzou e no Taiou (Coping with Rising Foreign
Exchange Reserves), Spring 2007 issue of the China Capital Markets Research, TokyoClub Foundation for Global Studies (in Japanese).
As part of the Chiang Mai Initiative, the Chinese government agreed to Bilateral Swap
Agreements (BSA) with six different countries amounting to a total of US$15.5 billion.
These BSA should be looked at as an additional buffer against any future financial crisesin the Asian region. China has bilateral agreements with six countries, two of which are
two-way agreements, Japan (US$3 billion) and Korea ($4 billion), with the other four being
one-way agreements (with only China being obligated), Indonesia (US$4 billion), Thailand(US$2 billion), Malaysia (US$1.5 billion), and the Philippines (US$1 billion).
In addition to this, it is probably also necessary to take into consideration administrative
costs and, if making trust investments, trust fees and other costs associated with trusts.
According to the 8 June 2007 edition of the China Securities Journal, the CIC is rumoredto be looking at following up its Blackstone investment with an investment in BHP Billiton,
the world's largest mining company. Premier Wen Jiabo's comment that the establishmentof the CIC would have no impact on the market for US dollars could also possibly beinterpreted as either (1) indicating that China may be considering reshuffling its existing
investment portfolio within each currency group, rather than across currencies, or (2)signifying that it would be additional increases in foreign exchange reserves that would be
passed to the CIC for investment.

China Seeks to Actively Invest Foreign Exchange Reserves53IV. How will the CIC be organized and governed?
1. Relationship with Central Huijin Investment Company Ltd.
Although the CIC is an organization under the direct jurisdiction of the StateCouncil, just as was the NSSF13, which had already begun investing overseas in 2006,
this was a point of contention when the CIC was established.
In fact, China already has a company that uses foreign exchange reserves as afunding source to inject public funds into state-owned commercial banks. That isCentral Huijin Investment Company Ltd. (Central Huijin), which in December 2003
injected US$22.5 billion each (US$45 billion total) into China Construction Bank andthe Bank of China using foreign exchange reserves.14 Subsequently, in April 2005,
Central Huijin injected US$15 billion into the Industrial & Commercial Bank of
China, and those funds also came from foreign exchange reserves.15
Central Huijin is managed by a board of directors and a board of supervisors, andits directors are seconded from the PBC, SAFE, and the Ministry of Finance. Both the
Chairman of the Board and the President have a central banking background fromeither the PBC or SAFE.

2. There were multiple proposals for organizational forms and governanceOne of the initial proposals for establishing the CIC called for having separateorganizations for domestic and overseas investments, with Central Huijin handlingdomestic investments and the CIC handling overseas investments. There wereapparently two different proposals for the organizational format and governance of the
CIC that were considered in parallel. One proposal was to create an intermediateholding company below the State Council and then have Central Huijin and the CIC
below that holding company, while the other proposal was to have the State Council
manage both Central Huijin and the CIC as two independent companies.16 Ultimately,
13

14

15

16

54

Established in August 2000 to address a future shortfall in China's social security funds.
The NSSF is actually being managed by a Council, which has the same status as a
Ministry.
Banks are prohibited from converting foreign currency-denominated assets into yuan. The
banks record the yuan-denominated contributions from Central Huijin as capital, andforeign currency-denominated assets are recorded as assets, but the exchange risk on
the bulk of the foreign currency-denominated assets is shifted to Central Huijin throughoption agreements (which give one party the right to repurchase foreign currency at apredetermined price). (The above is taken from Tsuyuguchi Yousuke, Ugokidasu
Chuugoku no Gaikajunbi (China starts to mobilize its foreign reserves), Gaiko Forum, July
2007 (in Japanese).)Capital was also injected into the securities firms China Galaxy, Shenyin Wanguo
Securities, and Guotai Junan Securities. It has also been rumored that both theAgricultural Bank of China and the China Development Bank are in line to receive capital
injections in the future. In addition, on 28 November 2007, the China Everbright Bank
agreed to accept a Rmb20 billion capital injection from the CIC.
During the debate over the organizational format and governance of the CIC, there
apparently was a power struggle going on behind the scenes that included Central Huijin
as well as the Ministry of Finance and the PBC.

Nomura Capital Market Review Vol.10 No.4

Central Huijin was integrated into CIC as a subsidiary, and the CIC has continued tofulfill its duties as investor representing the state with the charge of protecting andraising the value of state-owned financial assets.
The CIC's directors, in addition to the already mentioned Chairman of the Board of
Directors Lou Jiwei, President Gao Xiqing, and Chairman of the Board of Supervisors
Hu Huaibang, include Zhang Hongli (former Deputy Finance Minister), its Executive
Vice President (Figure 6). There are also three Vice Presidents, bringing the total toseven, all of whom were deeply involved in the establishment of CIC, which is also
known as the "seven man committee." Local news sources report that a board of
directors made up of 11 directors was established as CIC's decision-making body.17
On 21 November, the CIC published a website aimed at attracting talent from aroundthe globe.18

Figure 6: Management team of the China Investment Corporation
Title
Chairman, Managing Director
President, Managing Director
AuditorExecutive Vice President,
Managing Director
Vice president
Vice president
Vice president

Source:Name

Current post
Deputy Secretary-General of the State Council (previously
Lou Jiwei
Deputy Minister Finance)
Vice Chairman of the National Social Security Fund (formerly
Gao Xiqing
Vice Chairman of the China Securities Regulatory Commission)Commissioner of Discipline Inspection, China Banking
Hu Huaibang
Regulatory Commission
Zhang Hongli Deputy Minister of Finance
Wang Jianxi
Xie Ping
Yang
QingweiVice Chairman, Central Huijin Investment Company
President, Central Huijin Investment Company
Head of Fixed Asset Investment, National Development andReform Commission

Nomura Institute of Capital Markets Research, based on data from the China
Securities Journal, dated 8 October 2007

V. Conclusion
China is not the only country with government-affiliated institutional investors thattap foreign exchange reserves to make overseas investments. Years ago, Singapore
established Temasek in 1974 and then in 1981 established the Government ofSingapore Investment Corporation (GIC). More recently, the Korea Investment
Corporation (KIC) was established in 2005. Norway is a well-known example of thisis among the industrialized countries. Norway originally established a specialized
investment division, Norges Bank Investment Management (NBIM), within its central
bank, which has always been highly independent from the government. NBIM
conducts overseas investments of not only foreign exchange reserves, but also of thegovernment pension fund and the petroleum reserve fund.
17
18

Of the 11, three are full-time directors, five are part-time directors, one is an employee
director, and two are outside directors.
See http://www.cic-recruit.cn/

China Seeks to Actively Invest Foreign Exchange Reserves

55

These government-affiliated funds backed by foreign exchange reserves and oilrevenues, which have recently come to be known as sovereign wealth funds (SWF),
are expected by some analysts to have a growing influence on global capital markets.
Although governance and investment guidelines differ for each sovereign wealth fund,the market's attention is increasingly focused on the investment policies, information
disclosures, and transparency of the new investment company set up by China, which
has the world's highest foreign exchange reserves. In fact, a statement by the G-7
finance ministers and central bank presidents released on 19 October 2007 madespecial mention of sovereign wealth funds, noting the need for those funds to establish
best practices in regards to organizational structure, risk management, transparency,
and accountability, while asking the IMF, the World Bank, and the OECD to address anumber of issues pertaining to sovereign wealth funds. It will be interesting to watch
the direction taken by both the CIC and the NSSF, which has a longer history
investing overseas.

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