The Governance of China Investment Corporationon Its Way to Becoming a SophisticatedInstitutional Investor
Eiichi Sekine
Senior Analyst,
Nomura Institute of Capital Markets Research

I.

CIC's investment performance in 2009

1. Year-on-year performance improves in 2009
On 29 July 2010 China Investment Corporation (CIC) published its annual reportfor 2009. Established on 29 September 2007 independently of the People's Bank of
China and with the aim of diversifying China's foreign exchange reserves andobtaining a long-term return, CIC is a sovereign wealth fund with $200 billion toinvest both at home and abroad.
In 2009 it achieved a return of 11.7% on its overseas investments (compared with –2.1% in 2008) and an overall return on equity of 12.9% on its overseas and domestic
investments (the latter consisting of investments in domestic financial institutions)combined (compared with 6.8% in 2008) (Figure 1). Its investment performance wastherefore better in 2009 than in 2008.
Figure 1: CIC's investment performance
14%

12.9%
11.7%

12%
10%
8%

6.8%

6%
4%
2%
0%
-2%
-4%

-2.1%
2008
Return on capital

Source:1

2009
Return on global portfolio

Nomura Institute of Capital Markets Research, based on CIC's annual
report for 2009

Nomura Journal of Capital Markets Winter 2011 Vol.2 No.3

Figure 2: CIC's key financial indicators(RMB100mn)
3,500
3,000

3,324
2,975

2,500
600
2,000

500

449

1,500
400
300
1,000
200
500
100

240

231

240

231

449

417

417

0
2008
Total assets

Source:2009
Total investment income

Net income

Nomura Institute of Capital Markets Research, based on CIC's annual
report for 2009

As a result, CIC's total assets increased from $297.5 billion in 2008 to $332.4
billion in 2009, while its return on investment increased from $24.0 billion to $44.9
billion, and its net income from $23.1 billion to $41.7 billion (Figure 2).

2. Portfolio has been diversified
In achieving this performance, CIC timed its investments carefully. In 2008, iteschewed new investments and cashed in its existing ones as the global economy was
dragged down by the financial crisis. In 2009, however, it began to step up its
investments in May after the global financial system had shown signs of stabilizing in
the first quarter and after efforts to shore up domestic financial institutions andstimulate the economy had begun to bear fruit.
As a result, CIC made $58.0 billion of new overseas investments in 2009 as awhole1. Its approach to new overseas investments has had two distinct features. One
has been to diversify its portfolio by investing in publicly traded equities and bonds
around the world. The other has been to invest directly in leading companies in thefields of infrastructure and clean/renewable energy.
1

For more information on CIC's investments in 2009, see Sekine, Eiichi, "China's Foreign
Exchange Reserves and China Investment Corporation's Steps towards Diversifying How
It Manages Them," Nomura Journal of Capital Markets, Winter 2009, Vol.1, No.4 andSekine, Eiichi, "Shigen/Enerugii o Chuushin ni Kasoku suru Chuugoku CIC no
Kaigaitoushi" [CIC's Growing Investments Overseas, Especially in Resource and Energy
Companies], Kikan Chuugoku Shihon Shijou Kenkyuu, Winter 2010 (Japanese only).
The Governance of China Investment Corporation on Its Way to Becoming
a Sophisticated Institutional Investor

2

Figure 3: Breakdown of CIC's global portfolio
En d -2 0 0 8
Other, 0.4%

Equities, 3.2%

Fixed income

Alternative

En d -2 0 0 9

investments, 6%

securities, 9.0%

Equities, 36%
Fixed income
securities, 26%

Cash

Cash funds, 32%

funds, 87.4%

Source:Nomura Institute of Capital Markets Research, based on CIC's annual report for2009

Figure 4: Breakdown of CIC's global portfolio (diversified investments)
Div ers if ied equit y inv es t ment s

Div ers if ied f ix ed inc ome s ec urit ies

by geographic al region

by t y pe

Latin
Africa, 0.9%

America, 6.3%

Other
structured
products, 8%
ABS, 8%

North
Europe, 20.5%

America, 43.9%

Corporate

AsiaPacific, 28.4%

Source:Government

bonds, 13%bonds, 44%

Agencybonds, 27%

Nomura Institute of Capital Markets Research, based on CIC's annual report for2009

As a result, CIC's global portfolio underwent a major change between 2008 and2009. For example, its cash position declined from 87.4% to 32%, while equities
increased from 3.2% to 36% and bonds from 9% to 26% (Figure 3). At the same time,
its global equity portfolio (excluding direct investments) was 43.9% invested in North
America, 28.4% invested in the Asia-Pacific region, 20.5% invested in Europe, 6.3%
invested in Latin America, and 0.9% invested in Africa (Figure 4) while its global
fixed income portfolio was 44% invested in government bonds, 27% invested inagency bonds, 13% invested in corporate bonds, 8% invested in asset-backed
securities, and 8% invested in other structured products (Figure 4). Its main direct
investments are listed in Figure 5.

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Nomura Journal of Capital Markets Winter 2011 Vol.2 No.3

Figure 5: CIC's main direct investments (2009)

Company

Teck Resources (Canada)
JSC KazMuna Exploration
Production (Kazakhstan)Nobel Oil Group (Russia)

Contract
month
July
July
September

Amount ofinvestment

Type of investment

1,500Class B subordinate voting Mining and mineralsharesdevelopment

10.6%

270 Equity acquisition

45.0%

1,900 Private debt

Oil and gas
Thermal coal

Noble Group (Singapore)

September

858 Common stockSouthGobi Resources (Canada)

November500

AES Corporation (US)November

1,581 Common stock

Power generation

November

717 Common stock

Renewable energy

Source:17.2%

940 Global depositary receipts Oil and gas

September

Kong)ownership %($mn)

PT Bumi Resources (Indonesia)

GCL-Poly Energy Holdings (HongApproximate initial

Sectorproduction
Resources

30-year secured

Coal mining andconvertible debenture

exploration

14.9% of outstanding
shares on an undiluted
basis
15.0%
20.1% on a fully-diluted
basis

Nomura Institute of Capital Markets Research, based on CIC's annual report for 2009

3. Changes to CIC's governance and personnel systems contribute toperformance
CIC's annual report for 2009 points out that CIC's better performance in 2009 was
the result not only of its more aggressive investment stance but also of changes to its
governance and personnel systems.
We therefore now take a closer look at what the report says about CIC's investment
management process, risk management, personnel system, and human resource
development, especially the changes that were made in 2009. Some of thisinformation was previously available on CIC's website.

II. CIC's investment management process
1. Investment management prerequisites
1) CIC's organizational structure(1) Legal status
CIC was established on 29 September 2007 as a wholly state-owned company
incorporated in accordance with China's Company Law2. It was initially capitalizedwith $200 billion in reserves purchased from the People’s Bank of China in exchange
for RMB1,550 billion in government bonds issued by the Ministry of Finance, whichis therefore a key stakeholder. Of the $200 billion in registered capital, slightly over2

For further details of the arguments for and against the establishment of CIC, see Sekine,
Eiichi, "China Seeks to Actively Invest Foreign Exchange Reserves," Nomura CapitalMarket Review, Winter 2007, Vol.10, No.4.
The Governance of China Investment Corporation on Its Way to Becoming
a Sophisticated Institutional Investor4

50% was allocated to global investment. The balance is invested in domestic financial
institutions by CIC's subsidiary, Central Huijin Investment Ltd. (Central Huijin).
Central Huijin was established in December 2003 to inject public funds (in theform of foreign exchange reserves) into China's state-owned commercial banks. The
People's Bank of China is therefore another key stakeholder. The global investment
activities of CIC and the domestic investment activities of Central Huijin are
operationally completely separate, with strict firewalls between them.

(2) Thinking behind CIC's organizational structure
Under China's Company Law, CIC is required to have a board of directors and aboard of supervisors (Figure 6). Based on objectives and broad policy set by its
shareholder, China's State Council, the Board of Directors decides CIC's development
strategy, management policies, and investment objectives. Responsible for monitoring
the ethical behavior of directors and executives as well as the effectiveness ofsupervisory procedures within the company, the Board of Supervisors reports directly
Figure 6: CIC organizational chart

Board of Directors

Board of Supervisors

Remuneration
Committee
Executive Committee
International Advisory
Council
Chief Executive Officer

Supervision
Committee

Audit Committee

Chairman of Board of Supervisors
Board of Supervisors'
Office/Internal Audit Department
Risk Management
Committee

Investment Committee

Chief
Investment
Officer

Deputy Chief
Investment
Officer

Chief
Operating
Officer

Deputy Chief
Operating
Officer

Chief Risk
Officer

Institutional
Integrity
Department

Asset Allocation &Strategic Research
Department

Private Market
Investment Department
Special Investments
Department

Source:5

Public Relations &International
Cooperation
Department
Human Resources
Department

Legal &
ComplianceDepartment

Public Market
Investment Department
Tactical Investment
Department

Counselor

Risk Management
Department
Administrative
OfficeInvestment
Operations
Department

Finance &Accounting
Department

Information
Technology
Department

Nomura Institute of Capital Markets Research, based on CIC's annual report for 2009

Nomura Journal of Capital Markets Winter 2011 Vol.2 No.3

to the shareholder. It also has its own secretariat.
Directors are appointed by the State Council. The chairman of the Board ofSupervisors is appointed by the State Council from among the board's members.
There are 11 directors, five of whom come from the State Development and Reform
Commission, the Ministry of Finance, the Ministry of Commerce, the People's Bankof China, and the State Administration of Foreign Exchange (SAFE). The current
chairman (chief executive officer) comes from the Ministry of Finance, the vicechairman (president and chief investment officer) comes from the China Securities
Regulatory Commission (CSRC), and the executive vice president (chief operating
officer) also comes from the Ministry of Finance.
Figure 7: Members of CIC's Executive Committee
Committee members
Title

Name

Date of birth

Education & career
MA in economics, professor. PhD supervisor, Director General of the

Chairman & Chief
Executive Officer

Macroeconomic Control Department of the State Commission for Restructuring
Lou Jiwei

1950

the Economic Systems, Deputy Governor of Guizhou Province, Executive
Deputy Minister of Finance, Deputy Secretary General (ministerial level) of theState Council.
LLD, professor, PhD supervisor. General Counsel and the Director General ofVice Chairman, President& Chief Investment

the Public Offering Supervision Department, Deputy Chairman and Chief
Gao Xiqing

1953

Officer

Executive Officer of the Bank of China International (Holdings) Limited, Deputy
Chairman at the China Securities Regulatory Commission, Deputy Chairman of
the National Council for the Social Security Fund.
Graduate student of economics. Executive Deputy Director of China to the

Chairman of Board ofSupervisors

World Bank Group, Director General of the World Bank Department at the
Jin Liqun

1949

Ministry of Finance, Deputy Minister of Finance, member of the Monetary Policy
Committee of the People’s Bank of China, Vice President (Operations 1) of the
Asian Development Bank (ADB).

Executive Director,
Executive Vice President

PhD in economics. Deputy Director General of the Department of Education,
Zhang Hongli

1950& Chief Operating Officer

Science and Culture, Director General of the Budget Department, Deputy
Minister of Finance.
PhD in economics. Branch president of the Bank of Communications in Urumqi,

Executive Vice President

Peng Chun

1962

Nanning and Guangzhou, Assistant to the President, Executive Vice President,
and Executive Director of the Bank of Communications, currently Director andPresident of Central Huijin.
PhD in economics. General Manager of the Finance and Accounting

Executive Vice President& Deputy Chief

Fan Yifei

1964

Operating Officer

Department, General Manager of the Planning and Finance Department,
Assistant to the President, and Executive Vice President of China ConstructionBank.
PhD in economics, professor, PhD supervisor. Deputy Director General of the
Policy Research Office, Director General of the Non-Banking Supervision

Executive Vice President& Deputy Chief

Xie Ping

1955

Investment Officer

Department, President of the Hunan branch, Director General of the Research
Bureau, and Director General of the Financial Stability Department of thePeople's Bank of China, Chairman of Shenyin & Wanguo Securities Co. Ltd.,
President of Central Huijin.
PhD in accounting, PhD supervisor. Chief Accountant and Director General of
the International Department at the China Securities Regulatory Commission

Executive Vice President& Chief Risk Officer

Wang Jianxi

1951(CSRC), Chief Financial Officer and Executive Vice President of the Bank of
China International, President of the Bank of China International (UK), Assistant
Chairman of CSRC, Deputy Chairman of Central Huijin, Chairman of China
International Capital Corporation.
BEng. Deputy Director of Planning Institution of Chemical Industry, Deputy

Counselor & Member ofthe Executive Committee

Director of Planning Department at the Ministry of Chemical Industry, General
Liang Xiang

1955

Manager of the Second Credit Department, the Buyer Credit Department, theExport Credit Department, Assistant President, and Secretary of the Discipline
Inspecting Commission in the Export-Import Bank of China.

Source:Nomura Institute of Capital Markets Research, based on CIC
The Governance of China Investment Corporation on Its Way to Becoming
a Sophisticated Institutional Investor

6Under the Board of Directors is an Executive Committee (with currently nine
members, Figure 7), which is responsible for carrying out the Board of Directors'
decisions as well as for CIC's day-to-day operations, with authority to make required
operating decisions. Under the Executive Committee is an Investment Committee anda Risk Management Committee. The names and careers of all the members of theBoard of Directors, the Board of Supervisors, and the Executive Committee areposted on CIC's website. Central Huijin has a separate board of directors, a separateboard of supervisors, and a separate management and organization structure.

2) CIC's investment principles and strategy(1) Investment principles
According to CIC's annual report for 2009, its investment principles are as follows.
First, CIC invests on a commercial basis. Its underlying investment objective islong-term, sustainable and risk-adjusted returns for its shareholder.
Second, CIC is a financial investor. As such, it does not seek to control any
company.
Third, CIC is a responsible investor which abides by local laws and regulations in
the countries in which it invests, and exercises its corporate social responsibility
consciously.

(2) Investment strategy
CIC defines its investment strategy as follows.
First, CIC’s investments are research-driven and allocation-driven.
Second, CIC has based its investment approach and benchmark portfolio structure
on its mandate and unique circumstances, the risk tolerance of its shareholder, its
assessment of market conditions and policies established by its board of directors. In
addition, CIC also has learned from the experience of other sovereign wealth funds,
university endowment funds and pension funds, and consults with investment
professionals globally.
Third, CIC's benchmark portfolio consists of cash funds, equities, fixed income
securities and alternative investments. CIC’s investments are not limited to any sector,
geography or asset class.
CIC's articles of incorporation state that it may (1) invest in foreign currency
financial products such as domestic foreign currency bonds, (2) invest in financial
products such as overseas bonds, equities, investment trusts and financial derivatives,(3) invest in domestic and overseas equities, (4) employ overseas fund managers, (5)provide loans through entrusted financial institutions, (6) act as a custodian of foreignexchange reserves, (7) establish equity investment funds and fund management

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Nomura Journal of Capital Markets Winter 2011 Vol.2 No.3

companies, and (8) engage in any other business approved by the relevant government
departments.

2. Role of the various departments involved in the investment decision-making
process
1) Role of the Asset Allocation and Strategic Research Department
The Asset Allocation and Strategic Research Department (Figure 6) develops a
strategic asset allocation (SAA) plan, which has to be approved by the Board Of
Directors after being reviewed and approved by the Executive Committee. It also
develops a tactical asset allocation (TAA) plan, which it presents every quarter for
review by the Executive Committee.
The SAA seeks to strike a balance between absolute return and relative returnobjectives, taking into consideration diversification requirements, risk profiles,
benchmarked returns and deviations, as well as market opportunities. The TAA
allocates risk, return expectation and liquidity across asset types.
The TAA includes professional portfolio management techniques such as portfolio
optimization and rebalancing mechanisms, as well as currency overlay strategies3. It is
research-driven, quantitatively constructed and professionally executed.
The department also serves as the secretariat of the Investment Committee (seebelow). In addition, the department conducts research on various issues such as
strategy and policy, markets and industries, and product research, as well as portfolio
analysis, including performance measurement, risk/return attribution, and stresstesting.

2) Role of Investment Committee
The Investment Committee is responsible for CIC's investments (Figure 6). The
committee sets investment strategies and policies within guidelines approved by the
Board of Directors and the Executive Committee, and reviews and approves every
investment proposal and external manager’s mandate. It has 12 members with CIC'schairman/CEO as chairman (Figure 8).
All investments and mandates must be reviewed, deliberated on and approved by
the Investment Review Committee chaired by the chief investment officer before
being submitted to the Investment Committee for approval. The committee meetsweekly or more frequently when needed.

3This involves managing the currency element of a foreign currency asset separately fromthe underlying asset.
The Governance of China Investment Corporation on Its Way to Becoming
a Sophisticated Institutional Investor

8

Figure 8: Investment Committee
Chairman
DeputyChairman

Chairman & Chief Executive Officer
President & Chief Investment Officer
Vice President & Chief Operating Officer, Vice President &Deputy Chief Operating Officer, Vice President & Deputy
Investment Officer, Vice President & Chief Risk Officer

Members

Heads of Asset Allocation & Strategic Research Department andRisk Management Department
Heads of Public Market Investment Department, Tactical
Investment Department, Private Market Investment Department,
and Special Investments Department

Source:Nomura Institute of Capital Markets Research, based on CIC's annual report for20093) Function and role of investment departments
Based on decisions made by the Investment Committee, investments and mandates
are managed by four investment departments. Each formulates investment proposals
based on sound research within the context of the overall portfolio and risk
management framework, and builds and manages its portfolios.
Each also recruits external fund managers. Other departments (namely, the Asset
Allocation and Strategic Research Department, the Risk Management Department,
and the Legal and Compliance Department) are also involved in recruiting andevaluating external fund managers. The functions and roles of the investment
departments are as follows.

(1) Public Market Investment Department
This department implements traditional beta strategies. It is responsible forinvesting in public market equities, fixed-income products, commodities, andcurrencies as well as cash management. Investment activities are carried out by fiveteams: Developed Market Equities, Emerging Market Equities, Interest Rate and CashManagement, Credit Investment, and Commodities and FX Hedging. The department
makes extensive use of external managers, which invest the majority of the portfolio.

(2) Tactical Investment Department
This department manages proprietary portfolios and outsourced liquid absolutereturn portfolios. The department manages three global proprietary portfolios
internally (a hedged global equity portfolio, a long only value style portfolio and a

9

Nomura Journal of Capital Markets Winter 2011 Vol.2 No.3

multi-asset portfolio) and two liquid absolute-return investment portfolios (directionaland non-directional4) utilizing external hedge fund managers.

(3) Private Market Investment Department
This engages in private equity investment through external managers, coinvestment vehicles, partnerships and separate accounts. The department is also
responsible for real estate and infrastructure investments. It is comprised of four
investment teams. The Private Equity Team invests in PE funds directly and throughco-investment vehicles. The Real Estate Team invests in publicly traded REITS anddirect property investments. The Infrastructure Team and the Credit Opportunities
Team invest through external managers.

(4) Special Investments Department
This department makes and manages, on an in-house basis, direct large-scale
investments with concentrated positions over longer time horizons.

3. Investment department reforms of 2009
According to its annual report for 2009, CIC continued to strengthen its investment
management infrastructure and platform in that year. A Senior Operations
Infrastructure Development Steering Committee, chaired by the chief executive
officer and comprised of the chief operating officer and major department heads, wasformed to oversee projects to strengthen the investment management platform. This
company-wide initiative produced several key results in 2009:First, streamlining and strengthening the investment approval process bystandardizing procedures across all investing units and creating an enhanced review
process by a new Investment Review Committee chaired by the chief investment
officer.
Second, creating an investment operations department to strengthen coordination
among different units along the investment process, enhance investment back-officecapabilities, improve efficiency, strengthen internal control and better address preclose and post-close compliance controls and data management issues.
Third, developing CIC's proprietary trading infrastructure and better integrating the
proprietary trading, investment operation and accounting, risk analytics and general

4

A "directional" approach is a top-down approach that analyzes economic and financial
fundamentals and seeks to take advantage of price anomalies arising from political andeconomic changes at national and regional levels.
The Governance of China Investment Corporation on Its Way to Becoming
a Sophisticated Institutional Investor

10

Figure 9: Risk Management Committee
Chairman
DeputyChairman

Chairman & Chief Executive Officer
Vice President & Chief Risk Officer
Vice President & Chief Operating Officer

Members

Heads of Risk Management Department, Legal & ComplianceDepartment, Asset Allocation & Strategic Research Department
Heads of Public Relations and International Cooperation
Department, Finance & Accounting Department, Internal Audit
Department, Administrative Office

Source:Nomura Institute of Capital Markets Research, based on CIC's annual reports for2009

ledger systems to create a more rigorous straight-through processing (STP) 5
environment.
On 7 November 2010 CIC announced that it had established a wholly-owned
subsidiary in Hong Kong (CIC International (Hong Kong) Co., Limited) andappointed Professor Lawrence J. Lau, a former vice chancellor of the Chinese
University of Hong Kong and a former member of CIC's International Advisory
Council, to be its first chairman.

III. Risk management
1. Risk Management Committee
CIC also attaches great importance to risk management. It therefore has a Risk
Management Committee (Figure 6) with the same status as its Investment Committee.
It has 10 members with CIC's chairman/CEO as chairman (Figure 9).
The committee is responsible for devising and implementing CIC’s risk
management strategy in accordance with the investment policies and risk limits set by
the Board Of Directors and the Executive Committee. Its main responsibilities are
setting company-wide risk strategy, defining risk management policies, determining
exposure thresholds, reviewing and finalizing reports concerning risk management,
and establishing risk control evaluation criteria. The committee also has overall
responsibility for overseeing and controlling CIC's strategic, financial and operationalrisks.

5

Straight-through processing allows all the data needed to settle a trade (ranging from
confirmation to matching, clearing and settlement) to be processed automatically as aseamless stream of electronic data by transmitting it in a standardized format between
interoperable systems without the need for manual intervention, thereby increasing
efficiency and reducing operational risk and cost.

11 Nomura Journal of Capital Markets Winter 2011 Vol.2 No.3

The committee meets once a quarter or more frequently if needed. The investment
departments may attend the committee's meetings if necessary.

2. Role and function of Risk Management Department
1) Function and role of each department with regard to risk management
CIC has developed a comprehensive risk control system to manage market, credit,
sector, country, and currency exposure. Risk indicators are also developed andmonitored for each external investment manager. CIC utilizes an internationallyaccepted risk management system as its risk analytic and reporting backbone.
Positions are monitored using this system, and comprehensive risk management
reports are produced weekly, monthly and quarterly for management review.
Organizationally, the Risk Management Department and the Legal and ComplianceDepartment report to the chief risk officer. Investment risk, including credit, market,
liquidity and operating risk, is managed by the Risk Management Department. The
department reviews and comments on every investment and external manager
mandate proposal. In addition, it participates in the calculation of risk-adjusted
performance, assists in the evaluation of internal and external investment managers,
and monitors risk performance.
Within the Legal and Compliance Department, the legal team focuses on thedevelopment and review of contracts and the management of legal risk. The
department's compliance team is charged with the responsibility of ensuring that CIC
complies with investment and related laws and regulations of the markets in which it
invests as well as its own rules. Reputation risk, country risk, policy risk and othernon-commercial risks are addressed by the Public Relations and International
Cooperation Department.

2) Cooperation with the Asset Allocation and Strategic Research Department
The Risk Management Department works closely with the Asset Allocation andStrategic Research Department in implementing CIC’s risk management system.
“Risk Budgets” for each asset class are developed by the Asset Allocation andStrategic Research Department. The Risk Management Department then sets
appropriate risk limits based on these risk budgets. It meets monthly with each
investment department to discuss investment strategy, risk developments and otherinvestment risk management issues. Informal discussion and consultation are
conducted on a more frequent basis as needed.

3. Improvements to risk control processes in 2009
CIC's annual report for 2009 describes the following improvements that CIC madeto its risk control processes in that year.
The Governance of China Investment Corporation on Its Way to Becoming
a Sophisticated Institutional Investor

12Figure 10: CIC staff backgrounds
As at end-2009
Total

Number%Advanced

Overseas work

Overseas

Overseas

degreesexperienceeducation

citizenship

246

199

115

132

31

100%

81%

47%

54%

13%

(Compare: end-May 2009)
Total

Number
%Source:Advanced

Overseas work

Overseas

Overseas

degreesexperienceeducation

citizenship

194

184

73

85

18

100%

95%

38%

44%

9%

Nomura Institute of Capital Markets Research, based on CIC's annual reports for2008 and 2009First, it established an Operating Risk Group within its Risk Management
Department.
Second, it implemented a new internal control function throughout the organization.
Every departmental unit has identified an internal control representative responsiblefor identifying and monitoring operating risks within its department. The process ismanaged by the Internal Control Team, which is part of the Operating Risk Group
within the Risk Management Department.
Third, it increased the focus on managing operating and credit risk with clearing
banks and custodians.

IV. Personnel system and human resource development
1. Commitment to recruit staff with international experience
CIC requires its international recruits to be talented individuals with (1) plenty ofexperience of the main international financial markets and (2) an understanding of theChinese perspective, culture and language. CIC has no restrictions on nationality. For
those it recruits internationally, CIC requires a minimum of six years of relevantinternational experience. All candidates must apply through its on-line application
system, which includes subject matter testing in Chinese. All applicants completingthat process successfully are interviewed personally, and candidates above the seniorstaff level meet individually with each member of the senior management team.
During 2009 CIC’s staff grew from 148 at the start of the year to 194 at 31 May
and 246 at December 31 (Figure 10). Over the year it recruited about 100 new staff.
Quite apart from the increase in the number of its staff between May and December

13 Nomura Journal of Capital Markets Winter 2011 Vol.2 No.3

2009, CIC recruited more staff who had either worked or studied abroad or were nonChinese nationals. About half of its employees have overseas work or education
experience or both. 94% of the 83 staff in its investment departments have an
advanced degree (masters or above); 78% have received at least part of theireducation overseas; and 77% have overseas investment experience.

2. Staff evaluation
CIC has developed a comprehensive evaluation system to both reward performanceand to aid in defining training and development requirements for each employee.
Staff are evaluated on a 360-degree basis, with input by peers and subordinates aswell as supervisors. Evaluation is not only annual but also upon completion of majortasks and projects. Bonuses, annual pay increases and promotions are tied to theoutcome of the performance evaluation.

3. Staff training
CIC places great emphasis on the development of its people and has invested in an
extensive training program. The goal of the program is to develop not only the deepskills required for an individual’s assignment, but also a broad understanding of CIC’s
business across markets and products and a “sense of the market” in all its people.
Each employee has an annual training plan which is based on a formal skill
assessment as well as input from the performance evaluation system.
Each employee is required to undergo 80 hours of formal training each year.
Training is conducted at three levels: company-wide by the Human Resources
Department, at the departmental level, and at the individual level.
In addition, to build an overall understanding of CIC, staff meetings are held at
which senior executives discuss topics such as the role and operations of specificdepartments, the Santiago Principles 6 , technical issues such as risk management,
regulatory developments and compliance, economic developments, company
performance and the like.
Extensive use is made of local universities and professional organizations. Whilemost training takes place in China, some overseas programs are arranged for
employees as appropriate.

6

These are a voluntary code of behavior adopted by sovereign wealth funds in October
2008.
The Governance of China Investment Corporation on Its Way to Becoming
a Sophisticated Institutional Investor

14

4. Changes to personnel system in 2009
In 2009 CIC made two changes to its personnel system.
First, it implemented a new program to increase hiring of younger professionals
from top Chinese and global business and professional schools. Recruits enter a twoyear rotation program to allow them to better understand the entire organization, build
a broad set of skills and determine where their interests lie so that they can makeappropriate career choices.
Second, CIC adopted a new compensation system for all staff comprised of threeelements: a basic compensation element, a floating or variable compensation element,
which is based on evaluation of behavior and adherence to CIC’s core values, and abonus, which is based on results and achievements. A major objective of this system isto provide appropriate and long-term incentives and strong motivation among all its
staff and promote teamwork and harmony across the organization by explicitly
recognizing the importance of CIC’s values.
On 27 July 2010 CIC conducted a global recruitment campaign for positions in allits departments. Altogether 64 vacancies were advertised. This move was no doubt
related to CIC's objective, alluded to in the annual report, of, over time, increasing its
level of internally managed portfolios to enhance investment flexibility and reduceinvestment costs.

V. Conclusion
As we have seen, since its establishment in September 2007, CIC has put in place,and then modified, its investment procedures and risk management system. This
process has been one of seeing how an institutional investor such as itself could
incorporate a system of checks and balances (Plan – Do – See) in its internal systems.
Although CIC is generally seen as a sovereign wealth fund responsible to the StateCouncil and with senior officials from government departments as members of its
board of directors and board of supervisors, these efforts to establish a system ofgovernance on a par with that of a private-sector institutional investor should be
judged on their own merits.
It is now three years since CIC was established, and it is well on its way to
becoming a sophisticated institutional investor. However, we expect it to continue
these efforts. The more sophisticated CIC becomes as an institutional investor, themore likely its involvement is to be seen as a kind of investment benchmark. Similarly,
employment experience with CIC, be it in one of its investment departments or in a
middle or back office function, may become a benchmark for an investment
professional's worth. If that happens, CIC's operational model could become abenchmark for other emerging economy sovereign wealth funds. Japan also needs toconsider whether its capital markets might benefit if its operational model for its
public funds became a benchmark for other emerging economies.

15 Nomura Journal of Capital Markets Winter 2011 Vol.2 No.3

Similarly, as CIC becomes an increasingly important global player, increasing
attention has come to be paid to how it exercises its proxy. CIC sees itself as afinancial investor, investing solely on a commercial basis7. Companies in which it
invests may soon have to pay more attention to fostering good investor relations with
it. Nor is CIC the only Chinese institution classified as a sovereign wealth fund toinvest overseas: others are the National Social Security Fund (with assets totaling
RMB776.6 billion as of end-2009) and qualified domestic institutional investors(QDIIs) (with assets under management of $66.9 billion as of end-September 2010).
Japanese companies will probably also need to think about deploying some of theirknow-how and experience of fostering relations with other institutional investors intheir dealings with such mainland Chinese institutional investors.
Furthermore, it has been reported in the Chinese media that CIC has appointed adomestic fund manager as an external fund manager for the first time to manage an
MSCI-based fund using H shares and other China concepts stocks via its Hong Kong
office8. This appointment has been seen by asset managers in both China and overseas
as a new opportunity.
CIC's approach to corporate governance and staff development is likely to remain asubject of interest.

7

8

On 31 August 2010 the US Federal Reserve announced that it had approved an
application by CIC to acquire up to 10% of Morgan Stanley's voting common stock
following CIC's agreement not to exercise or attempt to exercise a controlling influence
over Morgan Stanley's management or policies.
Economic Observer, 19 August 2010 and Oriental Morning Post, 20 August 2010.
The Governance of China Investment Corporation on Its Way to Becoming
a Sophisticated Institutional Investor

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