Read More: China Sets a Course for Sovereign Wealth

By staff reporters Li Qing, Yu Ning, Ling Huawei and Chen Huiying

With US＄ 200 billion under management, China Investment Corporation (CIC), the nation’s first sovereign wealth fund (SWF), has attracted global attention with its blockbuster deals since its establishment in September 2007. In March 2007, CIC bought shares, worth US＄ 3 billion, in Blackstone; and in December 2007, it invested US＄ 5 billion in Morgan Stanley.

However, the creation of a “super baby” raises questions both externally and internally.

The recent limelight given to SWFs resulted from the U.S. sub-prime crisis that left many venerable American banks in desperate need of capital. SWFs came to the market’s rescue, but their soaring influence and government-ownership structure have led to concerns from the recipient countries.

Being one of the largest SWFs in the world, CIC will likely come under detailed scrutiny and may have to take measures to address those concerns to prove it is a responsible player in the international financial market.

CIC also faces internal challenges, one of which is how to best manage the fund. CIC, whose assets came from China’ massive US＄ 1.5 trillion foreign reserves, will likely apply a “higher return” investment strategy different from the traditional reserve management that emphasize safety and liquidity, and some analysts believe CIC may even consider an asset allocation of 15 percent in bonds, 35 to 40 percent in equities and the remaining in alternative investments including real estate and private equity.

Given CIC’s inexperience in asset management, however, some question whether CIC can efficiently and successfully manage ＄200 billion. They point to the Blackstone investment which has amounted to a loss of US＄ 1.27 billion due to the declining Blackstone share price.

Attracting top-notch fund management talents will likely prove difficult as CIC’s current compensation is not up to the international standard. Caijing learned that a front-desk fund manager at CIC would receive about US＄ 100,000, far short of what a similar position would command at a private fund manager.

It appears that CIC intends to progress gradually. Overseas investment managers will handle one third of US＄ 73 billion CIC allocated to overseas investments, and Caijing understands that CIC has already chosen an overseas institution for equity investment and is currently in the middle of selecting an institution for fixed-income investment.

CIC’s lack of legal base is also another cause for concern. While other SWFs have been set up through legislation, CIC was not established through National People’s Congress and therefore does not have a statutory backing.

This has produced uncertainty. First, despite CIC officials’ repeated declaration that CIC’s operations are commercially driven, concerns linger about potential administrative interference in the future. Also, the SWFs of developed countries have clear investment mandates and have consistently published information on key statistics. CIC is yet to release such information and it still remains unclear what CIC’s investment return objective is and what level of risk it would be willing to accept.

Meanwhile, other SWFs such as funds set up by State Administration of Foreign Exchange and national insurance funds are emerging in China. Potential competition among these players further complicates the scene.

How will CIC and Chinese policymakers respond to these questions? That’s a US＄ 200 billion question.