CIC and the Crisis

As an entity specializing in forex investment management, CIC has positioned itself differently from central banks, with their traditional forex management.

CIC’s mission is to diligently seek long-term investments that maximize returns while maintaining a rigorous approach to managing risks for the benefit of shareholders. Thus, through its management style, CIC sticks with a commercial orientation that maximizes financial returns. In terms of risk tolerance, CIC can afford rather high, short-term risk fluctuations to maximize long-term returns. In strategic assets allocation, CIC is more aggressive than traditional central banks in managing forex reserves by investing both traditional equity and fixed-income investments that have rather low liquidity but are forecast for rather high investment returns.

Affected by limited talent and capital, CIC developed an investment strategy based on “an investment approach that is a mixture of international financial products, with most assets invested in public market products and the rest invested in alternative assets.” Meanwhile, direct investment should not be abandoned. Investments are mainly made through external fund managers with a gradual increasing weight of proprietary investments.

In the past year, the global financial crisis has had impact on the immature CIC in terms of all its businesses, especially overseas financial products investments. But CIC is young and has a relatively limited investment volume at this early stage.

Meanwhile, CIC has worked hard to analyze and understand the global financial market and macroeconomic trends. The fund made timely adjustments to annual assets allocation by slowing equity-product investments and ensuring a prudent, cash-management-led investment strategy. The fund holds a rather high percentage of cash assets to prevent major risk and losses.

Overall CIC posted minor, book-value losses for outsourced investment in 2008. But overall financial conditions were stable and basically met the goals set in early 2008 by the board of directors. Its financial conditions were far better than for some other sovereign wealth funds.

In addition, CIC has strengthened its corporate governance system to provide the skills and supervisory mechanism for managing market risks.

CIC established clear investment guidelines, a risk framework, governance structure and operational mechanism by using all kinds of resources to ensure systemized risk management. Since its establishment, CIC’s operations have been based on economic and financial interests.

CIC’s supervisory mechanism includes a board of directors and executive committee. It also has a board of supervisors to create a two-tiered system of corporate governance for independent operations and effective supervision. The board of directors is mandated to oversee the fund’s operation and overall performance. The board of supervisors has the responsibility to oversee accounting and financial activities, as well as monitor whether the board of directors and senior executives follow a code of ethical conduct.

It is a most difficult year for the global economy in 2009. Macroeconomic trends and financial markets still bear huge uncertainties, especially for financial institutions in the United States and Europe with extremely weak balance sheets. It remains to be seen what sort of improvement policies will be implemented.

In the face of such a complex external environment, CIC will continue to strengthen strategic research, risk management and internal system building. Meanwhile, the fund will stick with its stable investment strategy – namely, a long-term and diversified investment strategy -- by balancing the allocation of all kinds of assets. Specifically, the company will lower its market risks by taking good control of investment timing and asset types while diversifying invested regions. CIC will make timely investments in open market equities as well as fixed-income and alternative assets in compliance with the fund’s assets allocation principle and assessment of international economic and financial conditions.

One thing that deserves emphasis is that CIC seeks financial returns for outsource investments; it does not take over companies or resources. CIC hopes to achieve win-win solutions so that the fund receives necessary investment returns,  while the companies that receive its investments can develop and benefit, making CIC a fund that’s welcomed by governments.

The author is chairman and CEO of China Investment Corp. This article is an adaptation of a speech delivered at the Second IMF Roundtable Seminar for Managers of Sovereign Wealth Assets and Reserves.

Full Article in Chinese: http://magazine.caijing.com.cn/2009-03-29/110129659.html