China: CIC censured for mismanagement

China Investment Corporation, the Chinese sovereign wealth fund, has been accused by the country’s top auditor of mismanagement that resulted in unspecified overseas investment losses.

The fund, which manages close to $600 billion, was censured in a rare public rebuke by the authorities for a state-operated entity. The move suggests that the ruling Communist party is serious about pushing through its ambitious reform agenda for financial markets and will not shy away from rebuking anyone who does not toe the party line.

The State Council recently said it would push ahead with measures aimed at increasing the competitiveness of Chinese markets, ensuing fairer capital allocation, increasing foreign investment, putting Chinese money to work overseas and improving transparency and corporate governance. And the Securities Association of China recently issued new rules governing IPOs.

'Dereliction of duty'

A report posted on the website of China’s National Audit Office said an audit carried out last year found a dereliction of duty by fund managers, inadequate due diligence and post-investment management in several investments made outside China in a five year period starting in 2008. It did not name the specific investments but said that some were unprofitable, some had unrealized losses and other could still lose money.

Responding to the auditor’s criticism, CIC said that it is improving how it manages overseas investments. It said it has formulated plans to rectify some of the issues highlighted by the National Audit Office and is amending some of the related mechanisms and procedures.

CIC was founded in 2007 as a wholly state-owned company with registered capital of $200 billion. At the time of its inception it was aimed primarily at diversifying China’s foreign exchange holdings. When it was first founded, it concentrated primarily on taking large stakes in some of the most famous names in US banking and finance, for example Blackstone, which was its first overseas investment and Morgan Stanley, which it helped save during the worst days of the global financial crisis by buying an equity stake.

But more recently the fund has said it is shifting its focus towards investments in agriculture and global food supply. Ding Xuedong, chairman of CIC, wrote in a recent editorial published in the Financial Times that the fund wanted to invest in agriculture around the world and across the entire value chain. He also said the fund was committed to contributing its share to local job creation and economic growth in the areas it invests in overseas.

China’s influence on the global stage is expected to grow as the new regime pursues a strategy of internationalization that focuses both on inbound and outbound investment.

It has some way to go. For while China’s foreign direct investment has grown in recent years, it is still small compared to more established economic powers such as the US and Japan.

Data from the United Nations shows that China’s foreign direct investment has increased strongly over the past decade – rising from around $2.5 billion in 2002 (less than 1% of the global total) to $84 billion in 2012, the most recent date for which figures are available. This means China is now the third largest investor globally. But putting into context how China has yet to fulfil its potential in this area, the US accounted for almost 24% of global investment in 2012, followed by Japan at 8.8%.

Global superpower

That China, now the world’s second largest economy, lags slightly in foreign investment is a function of the stage it is at in its evolution on a global stage. It is burdened by some particularly crippling constraints from domestic regulation. And beyond China’s borders, investment from it is often regarded with barely contained suspicion bordering on paranoia about ceding control to the coming global superpower.

Despite the challenges in investing in China, the country is also a big recipient of foreign direct investment. In 2012, China received around $121 billion in FDI, or around 9% of the global total, second only to the US, which received over 12%.

A US think tank, the Heritage Foundation, keeps a database of China’s overseas investment since 2005, breaking this down by country and industry. Until last year, China’s FDI stood at $479 billion, compared with investment of almost $2.8 trillion by investors from the US.

The data says the US and Australia were the two largest recipients of Chinese FDI between 2005 and 2013 – with $60 billion and $57 billion respectively. The US received 13% of the total investment over the period, while Australia received 12%.

The National Audit Office further underlined its determination to stress the importance of its new standards to Chinese entities recently when it said in another report that eight banks had improperly lent more than $60 billion to property developers and local government financing vehicles, set up because local governments are not allowed to borrow directly. The report said the banks used the interbank market to bypass lending limits.