Order Code RL34337
China’s Sovereign Wealth Fund
Updated May 5, 2008
Michael F. Martin
Analyst in Asian Trade and Finance
Foreign Affairs, Defense, and Trade Division

China’s Sovereign Wealth Fund
Summary
China established its major sovereign wealth fund, the China Investment
Corporation (CIC) on September 29, 2007 — six months after it first announced its
intention to create such a fund. Financed with $200 billion in initial capital, the CIC
is one of the largest sovereign wealth funds (SWFs) in the world.
Although some of the CIC’s initial investments were apparently political in
nature, the CIC’s top management have repeatedly asserted that future investments
will be commercially based, seeking to maximize the return on investment. Since its
creation, the CIC and its subsidiaries have already made several investments,
including the purchase of 9.9% of the U.S. financial firm, Morgan Stanley, on
December 19, 2007.
According to top Chinese officials, the CIC was created to improve the rate of
return on China’s $1.7 trillion in foreign exchange reserves and to “sterilize” some
of the nation’s excess financial liquidity. Depending on its performance with the
initial allotment of $200 billion, the CIC may be allocated more of China’s growing
stock of foreign exchange reserves. At the same time, other government-owned
financial entities in China — including the State Administration of Foreign Exchange
(SAFE) — have started to act like sovereign wealth funds and are making sizable
overseas investments.
A number of experts in international finance have expressed some concern
about the recent growth in SWFs and China’s creation of the CIC. Analysts have
cautioned that major shifts in SWF investments could potentially disrupt global
financial markets and harm the U.S. economy. Other experts are less concerned
about SWFs and the CIC, and welcome their participation in international investment
markets. China has responded by maintaining that the CIC will prove to be a source
of market stability. China has also stated that it has no intention of using its SWF to
disrupt the U.S. economy or global financial markets.
Despite China’s reassurances, there have been calls for greater oversight and
regulation of the activities of SWFs. The International Monetary Fund (IMF), in
consultation with many of the leading SWFs, is developing a set of voluntary “best
practices” for the operation of SWFs. The Organization of Economic Cooperation
and Development (OECD) is drafting policy guidelines for countries that are
recipients of SWF investments. Some international financial experts have suggested
elements to be included in such guidelines, including standards for transparency,
governance, and reciprocity. Other experts have suggested that the United States
should review its current laws and regulations governing foreign investments in the
United States, and possibly implement special procedures or restrictions on proposed
investments by SWFs. These include financial reporting requirement, limits on SWF
ownership of U.S. companies, and restrictions on the types of equity investments
SWFs can make in U.S. companies.
This report will be updated as circumstances warrant.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Administrative Details of the China Investment Corporation . . . . . . . . . . . . . . . . 4
CIC’s Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
CIC’s Working Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Investment Activities of China’s Sovereign Wealth Fund . . . . . . . . . . . . . . . . . . . 6
CIC’s Existing Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
CIC’s Future Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Investment Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Transparency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Reciprocity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Market Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
China’s Quasi-Sovereign Wealth Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
State Administration of Foreign Exchange . . . . . . . . . . . . . . . . . . . . . . . . . 15
State Development and Investment Corporation . . . . . . . . . . . . . . . . . . . . . 16
National Social Security Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Implications for China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Implications for Global Financial Markets and the U.S. Economy . . . . . . . . . . . 19
Multilateral Responses to SWFs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
IMF “Best Practices” Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
OECD Guidelines for Recipient Countries . . . . . . . . . . . . . . . . . . . . . . . . 23
Congressional Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Congressional Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
List of Figures
Figure 1. CIC’s Major Investments (as of 12/07) . . . . . . . . . . . . . . . . . . . . . . . . . 7
List of Tables
Table 1. Leading Sovereign Wealth Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

China’s Sovereign Wealth Fund
Introduction
China announced in March 2007 that it would be creating a sovereign wealth
fund (SWF) to invest its accumulated foreign exchange reserves more profitably.1
In May 2007, China Jianyin Investment Company, a government agency that was
designated to manage any asset purchases until the SWF was set up, bought a $3
billion nonvoting stake in Blackstone Group, a U.S. private equity firm. After a few
delays, China’s new sovereign wealth fund — the China Investment Corporation
(CIC) — officially started operations on September 29, 2007.
The CIC has proven to be of interest to Congress for several reasons. First, some
observers are concerned that its investment activities might have adverse effects on
certain financial markets and possibly the U.S. economy. Second, its creation signals
China’s intention to diversify its foreign exchange holdings away from U.S.
government securities into other forms of investment. Third, specific proposed
investments by the CIC may raise national security concerns. Fourth, some see the
possibility that China could use the CIC as a mechanism to pursue geopolitical
objectives.
With an initial capital fund of $200 billion, the CIC is a significant new addition
to the existing pool of SWFs (see Table 1). The CIC augments the $2 to $3 trillion
under management by SWFs worldwide. In addition, the SWF provides China with
another avenue by which it can invest its growing foreign exchange reserves, which
totaled $1.7 trillion as of March 2008.2 Also, the conversion of the foreign exchange
reserves into capital for the CIC may help “sterilize” some of the excess financial
1 According to the U.S. Department of the Treasury, a sovereign wealth fund is a
“government investment vehicle which is funded by foreign exchange assets, and which
manages those assets separately from the official reserves of the monetary authorities.” (U.S.
Department of the Treasury, Semiannual Report on International Economic and Exchange
Rate Policies
, June 2007.) For more information on sovereign wealth funds in general, see
CRS Report RL34336, Sovereign Wealth Funds: Background and Policy Issues for
Congress
, by Martin Weiss.
2 According to China’s State Administration of Foreign Exchange (SAFE), its foreign
exchange reserves as of the end of March 2008 totaled $1.68 trillion; monthly data are
provided on SAFE’s webpage — [http://www.safe.gov.cn].

CRS-2
liquidity in China that is reportedly contributing to China’s recent inflationary
pressures.3
Table 1. Leading Sovereign Wealth Funds
Size
Year
Country
Fund
($ Billion)
Created
United Arab
Abu Dhabi Investment Authority (ADIA)
500 - 875
1976
Emirates
Norway
Government Pension Fund - Global
375
1990
Singapore
Government of Singapore Investment
200 - 330
1981
Corporation (GIC)
Saudi Arabia
Saudi Arabian Monetary Agency
270
1952
Kuwait
Kuwait Investment Authority
213
1953
China
China Investment Corporation, Ltd. (CIC)
200
2007
Hong Kong
Exchange Fund Investment Portfolio
139
1993
Russia
Reserve Fund
128
2008
Singapore
Temasek Holdings
110
1974
Source: CRS summary of Table in Edwin Truman, “A Blueprint for Sovereign Wealth Fund Best
Practices,” Peterson Institute for International Economics, No. PB08-3, April 2008.
However, China’s decision to create the CIC has reawakened some concerns
about the impact of SWFs on global financial markets and engendered new
misgivings about China’s involvement in the international equity markets. David R.
Francis, columnist for the Christian Science Monitor, started his November 26, 2007
article, “Will Sovereign Wealth Funds Rule the World?,” with the words, “Sovereign
wealth funds are huge scarily big.”4 During a November 30, 2007 interview on
National Public Radio’s Morning Edition, Brad Setser of the Council on Foreign
Relations stated, “The rise of sovereign wealth funds represents a shift in power from
the U.S. to a group of countries that aren’t transparent, aren’t democracies, and aren’t
necessarily U.S. allies.”5 In June 2007, Clay Lowery, U.S. Treasury’s acting
Undersecretary for International Affairs, indicated in an interview that the rise in
government-owned investment funds could cause major changes in global markets
and bring about “financial protectionism.”6
Although the current value of CIC’s working capital is small when compared
to global capital flows, China could increase the size of CIC to over $1 trillion if it
makes more of its foreign exchange reserves available. The growth potential of CIC
3 For more on the possible role of the CIC in solving China’s excess liquidity problem and
inflationary pressures, see the World Bank’s Beijing Office’s Quarterly Update, September
2007; and Michael Pettis, “China’s Sovereign Wealth Fund,” September 24, 2007, available
at [http://www.piaohaoreport.sampasite.com/blog/Guest-blog-2.htm].
4 David R. Francis, “Will Sovereign Wealth Funds Rule the World?,” The Christian Science
Monitor
, November 26, 2007.
5 Adam Davidson, “U.S. Watches Nervously as Oil-Rich Nations Invest,” Morning Edition,
National Public Radio, November 30, 2007.
6 David J. Lynch, “U.S.: Secretive Global Funds May Hurt Treasuries Market,” USA Today,
June 21, 2007.

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may prove important because, according to Setser, somebody with a working capital
of $1 trillion (such as the CIC) would have the ability to push the U.S. economy into
a recession.7
There are also concerns about how China (and other nations) will invest the
capital of their SWFs. Before the creation of the CIC, China had invested much of
its foreign exchange reserves in U.S. government debt, such a U.S. Treasury bills (T-
bills), that were relatively risk-free, but offered relatively low rates of return on the
investment. Kenneth Rogoff, former chief economist for the International Monetary
Fund (IMF), indicated in a recent interview, “Countries like China just don’t need to
hold any more T-bills. There’s just no point.”8 As a result, most analysts expect the
CIC to invest in equities and/or acquisitions in order to obtain higher rates of return
on their investments. One financial expert’s analysis of China’s foreign exchange
reserve holdings from 2000 to 2007 shows a slight shift away from U.S. dollar
denominated assets.9
With its current capital stock, the CIC has the theoretical ability to purchase
controlling interests in or acquire major corporations, raising potential national
security concerns. According to financial journalist James Surowiecki, “Were China
so inclined, it could buy Ford, G.M., Volkswagen, and Honda, and still have a little
money left over for ice cream.”10 Surowiecki’s observation was echoed by well-
known investor Warren Buffett, who added that the annual U.S. trade deficit of
approximately $700 billion means the United States has to “give away a little part of
the country” every year.11 Buffet continued by auguring that if these trade deficits
continue the United States could wind up as a “sharecropper economy,” in which
U.S. citizens largely work for foreign-owned firms.12 In the opinion of Securities and
Exchange Commission Chairman Christopher Cox, “the fundamental question
presented by state-owned public companies and sovereign wealth funds does not so
much concern the advisability of foreign ownership, but rather of government
ownership.”13
However, others are less apprehensive about the potential impact of SWFs on
the global economy. Rogoff thinks the SWFs will do “more good than bad.”14
Surowiecki maintains that “some of the worries about the dangers posed by sovereign
wealth funds are overstated,” and that the SWFs “will act much like other investors,
7 Davidson, op. cit.
8 Lynch, op. cit.
9 Brad Setser, “Has China been diversifying away from the dollar?,” RGE Monitor, April
9, 2008.
10 James Surowiecki, “Sovereign Wealth World,” The New Yorker, November 26, 2007.
11 Francis, op. cit.
12 Ibid.
13 Christopher Cox, “The Role of Government in Markets,” Keynote Address and Robert R.
Glauber Lecture at the John F. Kennedy School of Government, October 24, 2007.
14 Ibid.

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and focus primarily on the bottom line.”15 Preston Keat of the global risk consulting
firm Eurasia Group echoes Surowiecki’s assessment, pointing out, “It’s a context of
mutual dependence. Blowing somebody else up does you at least as much financial
damage.”16
The investment activities of several SWFs, including the CIC, since the
outbreak of the subprime-mortgage crisis tend to support the views of Rogoff,
Surowiecki and Keat. Struggling major financial firms have received much needed
injections of capital from SWFs. On December 19, 2007, CIC invested $5 billion in
Morgan Stanley not long after the financial firm announced it was writing off $9.4
billion of loss-making mortgage investments.17 On January 15, 2008, SWFs from
Abu Dhabi, Kuwait, Singapore, and South Korea provided a $21 billion infusion of
capital to Citigroup and Merrill Lynch.18 During a period of global market
uncertainty, SWFs appeared to be providing a source of stability.19
Administrative Details of the China Investment
Corporation
The China Investment Corporation, Ltd. (CIC) is a semi-independent, quasi-
governmental investment firm established by the Chinese government to invest a
portion of the nation’s foreign exchange reserves. The CIC reports directly to
China’s State Council,20 conferring it with the equivalent standing of a ministry, and
the State Council’s leader, Premier Wen Jiabao. According to one source, the CIC
will have three major departments for its investment functions — 1. Central Huijin
Investment Company (CHIC), which will provide capital to domestic financial firms;
15 Surowiecki, op. cit.
16 Davidson, op. cit.
17 “China Fund Grabs Big Stake in Morgan Stanley,” AFP, December 19, 2007
18 Aaron Kirchfeld, “Sovereign Funds Beat Buffett with Stakes in Citigroup, Merrill,”
Bloomberg, January 22, 2008.
19 There are indications that CIC and other Chinese investors have been reluctant to invest
in more financial firms because of the perceived criticism of and discrimination against
Chinese investments in U.S. companies. For example, CITIC Securities cancelled a planned
$1 billion investment and joint venture in Bear Stearns on March 14, 2008 — the same day
the Federal Reserve announced its plan to bailout the ailing U.S. financial firm. For more
details, see Ma Wenluo, “Crisis and Opportunity in CIC’s ‘Fire Sale’ Acquisitions,” China
Stakes
, March 17, 2008. Similarly, China Development Bank’s planned investment in
Citigroup failed to receive the required government approval in January 2008. For more
details, see “Surprise: No CDB Funds for Citi,” China Stakes, January 12, 2008.
20 China’s State Council is the nation’s highest executive and administrative body, consisting
of Premier Wen Jiabao, four Vice Premiers, five State Councilors, Secretary General Hua
Jianmin, and the heads of China’s various ministries and special commissions. There are
approximately 50 members of China’s State Council.

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2. China Jianyin Investment, which will manage domestic assets and the disposal of
nonperforming loans; and 3. A new department to manage overseas investments.21
CIC’s Management
The investment activities of the CIC is to be directed by an 11-member board
of directors. The chairman of the CIC’s board is Lou Jiwei, China’s former deputy
finance minister and former State Council deputy secretary general. The CIC’s
general manager and president is Gao Xiqing, vice chairman of China’s national
pension fund and also one of CIC’s executive directors. Other people serving in
CIC’s top management include:
! Zhang Hongli, another of CIC’s executive directors and vice
minister of finance;
! Fu Ziying, assistant minister of commerce;
! Hu Xiaolian, deputy governor of the People’s Bank of China (PBC)
and Administrator of SAFE;
! Li Yong, vice minister of finance;
! Liu Shiyu, deputy governor of the People’s Bank of China ;
! Wang Chunzheng, ex-vice minister of the National Development
and Reform Commission (NDRC);
! Liu Zhongli, former minister of finance; and
! Zhang Xiaoqiang, vice minister of NDRC.22
The final member of the board is to be elected by the company’s employees. Initial
reports indicate the CIC is to have a staff of about 1,000 employees, including 100
to 200 investment specialists.23 Many of CIC’s workers will come from the
absorption of CHIC and China Jianyin Investment. In the first few months following
the formation of the CIC, its chief spokespeople were Lou Jiwei and Li Yong. More
recently, Gao Xiqing has been more prominent, including an extensive interview on
CBS’s “60 Minutes” on April 6, 2008.
There have also been reports that CIC is considering hiring several independent
financial consultants to manage its investments. On April 3, 2008, Reuters reported
that CIC had signed a deal with J.C. Flowers & Company, a U.S.-based investment
firm, launching a $4 billion private equity investment fund that would focus on
investments in U.S. financial assets.24 Neither CIC nor J.C. Flowers would confirm
the deal. If the new report is true, J.C. Flowers would be the first overseas fund
manager CIC has hired.
21 Pettis, op. cit.
22 “China’s Trillion-dollar Kitty is Ready,” Asia Times, October 2, 2007.
23 “China’s Forex Investment Company May Debut this Week,” Xinhua, September 10,
2007.
24 George Chen, “China’s CIC to Launch $4 Billion Fund with JC Flowers,” Reuters, April
3, 2008.

CRS-6
CIC’s Working Capital
The working capital for the CIC is coming indirectly from China’s
approximately $1.5 trillion in foreign exchange reserves. Under a plan approved by
the Standing Committee of China’s National People’s Congress in June 2007, the
Ministry of Finance was to issue up to 1.55 trillion yuan ($200 billion) in special
treasury bonds to provide the CIC with capital to purchase foreign exchange from
China’s central bank, the People’s Bank of China (PBoC). The CIC is to be
responsible for servicing the newly created debt — at an estimated cost of $40
million per day.25
The first tranche of the special treasury bonds — worth 600 billion yuan ($77
billion) — was sold on August 28, 2007, to the PBoC, using the Agricultural Bank
of China (ABC) as an intermediary.26 The 10-year bonds had a coupon value of
4.3%.27 A second tranche of bonds worth 103 billion yuan ($13 billion) was sold to
the Chinese public in mid-September. The September bonds were a mixture of 10-
and 15-year bonds with coupon rates ranging from 4.46% to 4.68%.28 A third tranche
worth 96 billion yuan ($12 billion) was sold to the public during November and
December, again with varying maturation periods of 10 and 15 years, with coupon
rates of 4.5%.29 The remaining 750 billion yuan ($97 billion) was sold to PBoC on
December 10, again using the ABC as an intermediary, with 15-year maturations and
a coupon rate of 4.45%.30
In converting 1.55 trillion yuan of foreign exchange reserves into $200 billion
in capital for the newly created CIC, China limited the amount of new debt issued to
the public to 199 billion yuan ($26 billion). Most of the newly issued bonds ended
up in the hands of the PBoC, effectively sterilizing some of the perceived excess
liquidity in China’s money markets.
Investment Activities of China’s
Sovereign Wealth Fund
The investment objectives of the CIC are gradually being revealed by CIC’s
leadership. Just prior to the creation of China’s sovereign wealth fund, Jesse Wang
Jianxi, a member of the CIC’s preparatory group, stated, “The mission for this
25 Cost of debt estimate based on a statement by CIC Chairman Lou.
26 The PBoC cannot directly purchase bonds from China’s Ministry of Finance, so it used
the ABC as an intermediary in the financial transaction.
27 Rachel Ziemba, “How is China Funding the Chinese Investment Corporation (CIC)?”
RGE Analysts’ Economonitor, December 5, 2007.
28 Ibid.
29 Ibid.
30 “China Central Bank Takes Up 750 Bln Yuan in T-bonds to Fund CIC,” AFX News
Limited
, December 10, 2007.


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company [CIC] is purely investment-return driven.”31 However, the actual meaning
of “purely investment-return driven” is open to interpretation. In April 2008, Wang,
in his new role as CIC’s executive vice president and chief risk officer, provided a
more specific statement of CIC’s investment goals, indicating that the company was
“quite conservative at this time,” seeking a rate of return on its investments of “about
mid-one-digit or slightly above one digit.”32
CIC’s Existing Investments
A fair amount of information is available about the existing investments of the
CIC. However, because of the manner by which China is publicizing CIC-related
activities, it is often difficult to obtain specific information about investment
transactions. In particular, China frequently announces planned investments shortly
before the financial transaction is to take place and subsequently mentions in passing
that the planned investment has occurred, but rarely reports on the investment the day
the actual transaction happens. While this pattern demonstrates some relative
transparency about CIC activities, it also indicates an apparent reluctance to be
completely forthcoming about the details of the CIC’s investments. Figure 1
provides an overview of CIC’s current direct and indirect investments as of the end
of 2007, based on available news reports.
Figure 1. CIC’s Major Investments (as of 12/07)
Source: CRS research.
The investment options of the CIC are constrained in part by previous
commitments made before the formal start of its operations. On May 20, 2007,
China Jianyin Investment Company, a wholly owned subsidiary of the Central Huijin
Investment Company (CHIC), signed an agreement to purchase a less than10% stake
31 Jason Dean and Andrew Batson, “Beijing to Take Passive Investment Approach,” Wall
Street Journa
l (Europe), September 10, 2007.
32 Michael Flaherty and Dominic Whiting, “China’s CIC Defends Transparency, Eyes
Modest Returns,” Reuters, April 2, 2008.

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in Blackstone Group in non-voting shares worth $3 billion.33 The decision to
purchase less than 10% of Blackstone’s shares, and to purchase nonvoting shares,
was apparently not an arbitrary one. According to Blackstone’s CEO and Chairman
Stephen A. Schwarzman, “The deal is ‘purely commercial’ and do [sic] not need the
U.S. government approval as the stake is less than 10 percent.”34 According to
executive vice president Wang, CIC will hold onto its Blackstone stock for five to
seven years, or longer.35
In November 2007, the newly formed CIC assumed responsibility for the assets
and liabilities of the CHIC, which was previously owned by the PBoC. It is reported
that the PBoC obtained about 500 billion yuan ($67 billion) in compensation for the
CHIC.36 This transaction utilized approximately one third of the CIC’s working
capital. As a result, the CIC became the parent company for CHIC and China Jianyin
Investment Company, plus owner of $3 billion in Blackstone Group stock. In
addition, CIC indirectly became a major stock holder in China Construction Bank
(CCB) and the Industrial and Commercial Bank of China (ICBC) by way of the
investments of CHIC and China Jianyin Investment Company in those two banks.37
Also in November 2007, a decision was made that the CIC was to provide
capital totaling a reported $67 billion to two of China’s state-owned banks, the
Agricultural Bank of China (ABC) and the China Development Bank (CDB).38 After
its investment in the ABC, the CIC would supposedly own one-third of the bank with
another third owned by China’s Ministry of Finance.39 Other sources reported that
a financial restructuring plan for the ABC submitted to the State Council for approval
was to be announced in late 2007, and the plan would include $40 billion from the
CIC, possibly through the newly acquired CHIC.40 However, on December 5, 2007,
a representative of the ABC stated that “overseas media reports concerning the
bank’s shareholding reforms were false,” but did not indicate which aspects of those
33 “China to Invest $3 Bln in Equity Giant Blackstone,” Xinhua, May 21, 2007.
34 Ibid.
35 Shangguan Zhoudong, “CIC May Hold Blackstone Stake for 5 to 7 Years,” China Daily,
March 6, 2008.
36 “$200 Billion Investment Firm Starts Operation,” by Xin Zhiming, China Daily, October,
1, 2007.
37 According to CCB’s webpage [http://www.ccb.com], the CHIC owns 70.69% of CCB’s
shares, including 9.21% owned by its subsidiary, Central Jianyin Investment Company.
According to the ICBC’s webpage [http://www.icbc.com.cn], the CHIC owns 35.33% of
ICBC’s shares.
38 “China Investment Co to Invest a Third of Its 200 Bln USD ‘Cautiously’ — Official,”
AFX News Limited, November 7, 2007.
39 Yidi Zhao and Janet Ong, “Chinese Banks to get $67 Billion from Sovereign Wealth
Fund,” International Herald Tribune, November 8, 2007.
40 “Agricultural Bank of China to Announce Financial Restructuring Plan Soon,” AFX News
Limited
, December 3, 2007, and “Agricultural Bank of China Sets Up Investment Banking
Operations,” AFP, December 4, 2007.

CRS-9
reports were incorrect.41 A news article in March 2008 cited an ABC spokesman as
saying that reports of CIC’s investment in ABC were “not true.”42 As a result, it is
uncertain if, when and how much the CIC has invested in the ABC.
More details of the CIC’s investment in the CDB were announced on the final
day of 2007. CIC’s subsidiary, the CHIC, signed an agreement on December 31,
2007, to invest $20 billion into the CDB.43 A separate source reported on January 2,
2008, that the investment had already occurred and confirmed both the amount of the
investment and the use of CHIC to make the investment.44
The CIC has reportedly made three other major investments since its
establishment. On November 21, 2007, the CIC announced plans for its first post-
inaugural investment — the purchase of $100 million in shares of Hong Kong’s
initial public offering for the new China Railway Group (CRG).45 China Railway
Group is a railway construction company in China, and reportedly one of the largest
construction companies in the world. The Government of Singapore Investment
Corporation, another SWF, reportedly also bought shares in CRG.46
The second major investment took place on December 19, 2007, when the CIC
purchased “around 9.9%” of Morgan Stanley, one of the largest U.S. investment
banks.47 The CIC investment in Morgan Stanley reportedly amounted to $5 billion.
At the time of the investment, Morgan Stanley stressed that the CIC will have “no
special” rights of ownership and no role in corporate management.48 The third major
CIC investment occurred on March 24, 2008, when China’s SWF invested “more
than $100 million” in Visa’s initial public offering (IPO).49
CIC’s newly acquired subsidiary, the CHIC, also has been making investments.
In addition to its investment in CDB, the CHIC announced on November 8, 2007, it
intended to purchase a 70.92% stake in China Everbright Bank, a Beijing-based joint-
equity commercial bank founded in August 1992.50 On November 28, 2007, the
shareholders of China Everbright Bank agreed to accept a 20 billion yuan ($2.7
41 “Agricultural Bank of China Denies Shareholding Reform Approval Rumor,” Xinhua,
December 5, 2007.
42 “Agricultural Bank of China Says Report on CIC Unit’s Investment Plan Not True,” AFX
News
, March 2, 2008.
43 Xin Zhiming, Huijin to Inject $20b into China Development Bank,” China Daily,
December 31, 2007.
44 “China Investment Corp Injects $20 Bln in CDB,” China Business News, January 2, 2008
45 Jamil Anderlini, “CIC to Buy Stake in HK Rail Group Float,” The Financial Times,
November 21, 2007.
46 “CIC Invests in China Railway IPO,” China Economic Review, November 21, 2007.
47 “China Fund Grabs Big Stake in Morgan Stanley,” AFP, December 19, 2007.
48 Ibid.
49 “China Wealth Fund Invests $100 Mln in Visa IPO,” Reuters, March 24, 2008.
50 Mao Lijun, “Central Huijin Bails Out Everbright Bank,” China Daily, November 8, 2007.

CRS-10
billion) capital injection from the CHIC.51 The CHIC’s financial support to China
Everbright Bank reportedly will be sufficient for it to go ahead with its planned initial
public offering (IPO) on the Hong Kong Stock Exchange (HKSE) and China’s A-
share stock market.52 On December 5, 2007, China Everbright Bank announced that
it is planning on holding its IPO in June or July of 2008.53
Overall, the reported existing direct and indirect investments of the CIC total
about two-thirds of its total working capital, leaving about $70 billion available for
future investments. So far, most of CIC’s investments have apparently been made
based on noncommercial criteria. For example, there are indications that the State
Council, the PBoC and the NDRC insisted that the CIC provide help in the
restructuring of these two state-owned banks as a condition of the CIC’s
establishment.54 Similarly, the payment to the PBoC for the CIC’s acquisition of
CHIC and its subsidiary, China Jianyin Investment Company, may have been driven
more by political considerations than economic ones. The noncommercial character
of the CIC’s existing investments may lead to increased interest and surveillance on
its future investments.
CIC’s Future Investments
Since the day China announced the formation of the CIC, senior representatives
of the new corporation and various government agencies have been actively
publicizing that China’s SWF would operate with a high degree of transparency
utilizing an investment strategy based on commercial principles. China has also
shown some sensitivity to existing apprehensions about the possible overseas
investments the CIC might make, and CIC representatives have publicly announced
that the new SWF will not invest in certain sensitive sectors and markets. However,
the Chinese government has also made it known that it is concerned about undue
criticism or scrutiny of the CIC, and in particular, is worried that other nations
(including the United States) may try to use the creation of China’s SWF as an
opportunity to implement protectionist measures targeted at the Chinese economy.
In sum, China has handled the creation of the CIC in a fairly common Chinese
fashion of combining reassuring statements with veiled warnings.
Investment Strategy. Prior to the creation of the CIC, Chinese officials were
already making statements indicating that its investment strategy would be to
maximize the rate of return on its investments. Jesse Wang, a member of the CIC’s
preparatory group, stated on September 10, 2007, “The mission for this company is
purely investment-return driven.”55 On the day the CIC was created, CIC deputy
general manager Yang Qingwei stated, “The company’s principal purpose is to make
51 “China Everbright Agrees to Capital Injection Plan,” China Daily, November 28, 2007.
52 Ibid.
53 “China Everbright Bank Reportedly Plans IPO Next Summer,” Xinhua, December 5, 2007.
54 Pettis, op cit.
55 Jason Dean and Andrew Batson, op. cit.

CRS-11
profits.”56 More recently, during his first overseas trip as CIC’s chairman, Lou
provided a more nuanced explanation of the company’s investment strategy, “We
will adopt a long-term and prudent investment principle and a safe, professional
portfolio strategy that adapts to market changes, which will put emphasis on a
rational match of returns and risks.”57
The CIC’s need for relatively high rates of return on their investments is
partially being driven by the manner in which the company has received access to
China’s foreign exchange reserves. According to one of the CIC’s top managers, the
company is responsible for servicing the interest on the 1.55 trillion-yuan of bonds
issued by the PBoC (see above). According to CIC Chairman Lou, the interest cost
on the outstanding bonds amounts to 300 million yuan ($40 million) per day.58 With
a minimum return of $40 million per day, the CIC will need to earn at least $14.6
billion per year in profits — or at least 7.3% on its total capital of $200 billion. There
was a report that CIC was late in making its first interest payment to the PBoC,
despite the receipt of a dividend payment from Blackstone.59
Also, as Lou points out, the CIC’s ability to obtain access to more of China’s
foreign exchange reserves will depend on its profitability. There has been some
domestic criticism of CIC’s investment in Blackstone, which as of April 15, 2008,
was down 41% from its purchase price. Similarly, CIC’s other major U.S. purchase
— Morgan Stanley — was trading about 10% below the lower range of the agreed
transaction price.60 “If I am making losses every day, how can I face asking the
government for more money?” asked Lou.61
There have also been some indications on the actual types of investments the
CIC will be making and where it will be making investments. A CIC representative
reportedly stated that it will focus its international investments on a “portfolio of
financial products.”62 CIC Chairman Lou told a group of financial experts in Beijing
that most of the CIC’s investments would be in publicly traded securities, but that it
would also make some direct investments.63
Officials with the CIC have indicated that it is considering making investments
in Hong Kong and Taiwan, and it is talking with stock exchange officials in London.
56 “China’s Trillion-dollar Kitty is Ready,” Asian Times, October 2, 2007.
57 “CIC to be Stable Force in Global Financial Market,” Xinhua, December 11, 2007.
58 “China’s Sovereign Wealth Fund Seeks to be a Stabilizing Presence in Global Markets,”
Xinhua, November 30, 2007.
59 “China’s Sovereign Wealth Fund in Interest Troubles,” China Stakes, March 5, 2008.
60 In their agreement, CIC and Morgan Stanley set a transaction price range for Morgan
Stanley stock of between $48.07 and $57.684 per share.
61 “China Wealth Fund Aims for Stability, Openness,” China Daily, October 16, 2007.
62 Xin Zhiming, “China’s State Forex Investment Company Debuts,” China Daily,
September 29, 2007.
63 “China’s Sovereign Wealth Fund Seeks to be a Stabilizing Presence in Global Markets,”
Xinhua, November 30, 2007.

CRS-12
The CIC is also expected to set up branches overseas, but the locations of its overseas
branches are still to be determined.
At the same time, China has also been providing reassuring statements about the
types of investments the CIC would not be making. Chinese officials reportedly told
German Chancellor Angela Merkel during her visit to China in August 2007 that the
future CIC “had no intention of buying strategic stakes in big western companies.”64
CIC Chairman Lou has indicated that the CIC will not invest in infrastructure.65
China’s Vice Minister of Finance Li Yong also dismissed “rumors that China would
try to buy out European and American companies in large numbers.”66 Vice Minister
Li has stated that the CIC would not buy into overseas airlines, telecommunications
or oil companies.67 An unnamed contact at CIC indicated that the SWF also will not
make investments in foreign technology companies as a means of obtaining advanced
technology, pointing out, “That’s political, and we don’t do that.”68
Despite the reassurances provided by the CIC, some observers are unconvinced
that China’s SWF has a clear investment strategy that is free from political
influences. Setser gave a negative answer to his own rhetorical question, “Does the
China Investment Corporation (CIC) have a coherent investment strategy?”69
According to Setser, “There clearly isn’t a consensus inside China on what the CIC
should be doing.”70 A reporter for the Financial Times mirrored Setser’s appraisal,
writing, “Such a concentration of the country’s wealth in one entity has inevitably
drawn intense interest ... from powerful forces within the state bureaucracy. Each of
these groups has its own ideas on how the money can best be spent.”71
Transparency. CIC officials and other leading economic figures in China
have also been making reassuring statements about the transparency of the CIC’s
operations and management, but often with a caveat or two. For example, on the day
the CIC was launched, Chairman Lou said, “We will adopt a prudent accounting
system ... adhere to commercial lines and improve the transparent [sic] on the
64 Pettis, op. cit.
65 “China’s Sovereign Wealth Fund Seeks to be a Stabilizing Presence in Global Markets,”
Xinhua, November 30, 2007.
66 “Investment Fund Announces Strategic Plans,” Xinhua, November 9, 2007.
67 “China Investment Corporation Unveils Investment Plan,” Xinhua, November 7, 2007.
68 Keith Bradsher, “$200 Billion to Invest, But in China,” The New York Times, November
29, 2007.
69 Brad Setser, “Does the China Investment Corporation (CIC) Have a Coherent Investment
Strategy?” online blog #234551, available at
[http://www.rgemonitor.com/blog/setser/234551/].
70 Ibid.
71 Jamil Anderlini, “China Wealth Fund’s Early Coming of Age,” Financial Times,
December 21, 2007.

CRS-13
condition that company interest will not be jeopardized.”72 In April 2008, CIC’s
Wang contrasted CIC’s operations to the Government of Singapore Investment
Corporation (GIC) indicating that while CIC discloses its investments in the United
States, the GIC does not.73 According to Wang, “CIC is one of the most transparent
sovereign funds in the world.”74
However, the degree and pace at which China will make the CIC transparent is
uncertain. During a dinner at the mayor of London (England)’s mansion, Lou
expanded on his previous statement, “We will increase transparency without harming
the commercial interests of CIC. That is to say, it will be a gradual process... If we
are transparent on everything, the wolves will eat us up.”75
Reciprocity. The creation of the CIC is not being done in isolation from
China’s overall policy on inward and outward capital movements. However, while
much of the rest of the world would apparently prefer that China focus on liberalizing
various aspects of its inward capital flow policies, much of its recent effort has been
on laws and regulations governing its outward capital flows. At present, more
foreign direct investments (FDIs) are flowing into China than are flowing out of
China. The combination of China’s net FDI inflows and overall trade surplus is
financing the growth of its foreign exchange reserves.
The Bush administration has been pressuring China to make its stock and bond
markets more open to foreign investors, matching the comparative openness of its
inward FDI policies.76 However, of late, China has been more concerned about
increasing the avenues by which it can redirect more of its domestic foreign exchange
holdings towards investments outside of China. Some have advocated that China
push to the United States to make the U.S. financial industry more open to foreign
investment.77 In addition, the Chinese government is gradually introducing reforms
to its outward FDI laws and regulations.
72 Xin, op cit..
73 Michael Flaherty and Dominic Whiting, “China’s CIC Defends Transparency, Eyes
Modest Returns,” Reuters, April 2, 2008.
74 Ibid.
75 “China Investment Corp Warns Western Governments Against Protectionism,” AFX News
Limited
, December 10, 2007.
76 China does restrict inward FDI in what it considers economic sectors related to national
and economic security, including certain agricultural and fishing industries, selected mining
industries, traditional Chinese medicine processing, nonferrous metal industry, electric
machinery manufacturing, postal services, geological surveying, news agencies, publications
industry, and radio and televisions stations and networks. For a complete list of “prohibited
foreign investment industries,” see “Decree of the State Development and Reform
Commission, the Ministry of Commerce of the People’s Republic of China, No. 57,”
Department of Foreign Investment, November 22, 2007, available online at
[http://english.mofcom.gov.cn/column/print.shtml?/policyrelease/announcement/200711/
20071105241195].
77 Ma Wenluo, “China Should Press for Wider Openness to US Financial Industry,” China
Stakes, April 15, 2008.

CRS-14
For example, China rolled out a program in April 2006 creating “qualified
domestic institutional investors” (QDIIs) that would allow Chinese nationals to invest
in global investment funds offered by the QDIIs.78 China has already approved a
number of QDIIs — Bank of Communications Schroder, China AMC, China
International, China Southern Fund, Fortis Haitong, Fortune SGAM, Harvest Fund,
Yinhua — and reportedly plans on approving more QDIIs in the future. As part of
China’s controls on foreign exchange, each fund is provided a quota limiting the size
of its fund by the State Administration of Foreign Exchange (SAFE). China has also
placed restrictions on the overseas markets in which the funds may invest. It has
already approved Hong Kong and London, and is considering the United States. By
the end of September 2007, just under $11 billion had been invested in the existing
QDIIs.79 JP Morgan estimates that about $90 billion will be invested in QDIIs by the
end of 2008.80 The goals of the QDII program are to offer Chinese investors new
options, and to soak up some of China’s excess liquidity by moving funds overseas.
China’s apparent efforts to improve the reciprocity of its investment policies
have been accompanied by warnings to other nations about using the creation of the
CIC and the possible rise in Chinese overseas investments as an excuse to raise
inward investment barriers, especially on the ground of “national security.” On
December 10, 2007, CIC Chairman Lou cautioned during a dinner at the mayor of
London’s mansion, “If an economy will use national security as a criteria for entry
of sovereign wealth funds, we will be reluctant to tap the market because you are not
sure what will happen.”81 Lou continued by stating that “any protectionist backlash”
against SWFs could “change the stability and security of global financial markets.”82
During the December 2007 Strategic Economic Dialogue (SED) in Beijing,
Zhang Xiaoqiang, Vice Minister of the National Development and Reform
Commission, made an apparent indirect comment on the recently passed Foreign
Investment and National Security Act of 2007 (P.L. 110-49), “We hope U.S. policies
and regulations do not become a barrier for Chinese investors.”83 According to
Zhang, “Investors both from the U.S. and China have shown a strong desire to invest
in each other, and it’s necessary for both countries to create a sound investment
environment for them.”84 Zhang specifically cited China’s concerns about U.S. use
of national security as a barrier to Chinese investors, and greater scrutiny and
78 China has also created a “qualified foreign institutional investors” (QFIIs) program that
allows foreigners to invest in Chinese companies via funds offered by the QFIIs. In May
2007, China pledged to increase the limit on QFIIs to $30 billion during the Strategic
Economic Dialogue (SED) held in Washington, but did not officially raise the limit until just
before the SED held in Beijing in December 2007.
79 “China’s CIC Wins $5 Bln Investment Quota - Paper,” Reuters, December 17, 2007.
80 Ibid.
81 “China Investment Corp Warns Western Governments Against Protectionism,” AFX News
Limited
, December 10, 2007.
82 Ibid.
83 Fu Jing, “US Policies May Deter Investors from China,” China Daily, December 12, 2007.
84 Ibid.

CRS-15
possible discrimination against China’s state-owned enterprises (SOEs) that wish to
invest in the United States.
Market Stability. China has also indicated that they see sovereign wealth
funds (like the CIC) being a “stabilizing force in the international market,” in contrast
to hedge funds, which are “a source of market instability.”85 For example, at a
conference in Beijing, CIC Chairman Lou noted that SWFs have been injecting
capital into financial institutions “that suffer from the subprime crisis; they are
stabilizing the market. CIC will also do the same thing.”86
According to CIC Chairman Lou, “Judging from our investment strategy and
scale, we are unlikely to present a major impact on the international market.”87 As
a precaution, China’s Vice Minister of Finance, Li Yong, has indicated that the CIC’s
investments will be made “gradually” and “cautiously.”88
China’s Quasi-Sovereign Wealth Funds
In addition to the CIC, China has other government entities that act as quasi-
sovereign wealth funds. The key entities are the State Administration of Foreign
Exchange (SAFE), the State Development and Investment Corporation (SDIC), and
the National Social Security Fund (NSSF). Each of these entities has recently taken
actions indicating a greater willingness to invest overseas.
State Administration of Foreign Exchange
The State Administration of Foreign Exchange, or SAFE, reports directly to
China’s State Council and the PBoC.89 Its main function is to manage China’s foreign
exchange, including the maintenance of balance of payments statistics, regulating and
monitoring foreign exchange transactions, and managing China’s foreign exchange
reserves. It is in this last capacity that SAFE has the ability to operate like a SWF.
SAFE generally invests China’s foreign exchange reserves in traditional items,
such as U.S. treasury bonds. According to one source, 70% of SAFE’s assets are in
U.S.-dollar denominated bonds.90 However, there are signs that SAFE is diversifying
its investment portfolio. Late in 2007, SAFE purchased minority stakes of less than
1% in three of Australia’s larger banks — ANZ Bank, Commonwealth Bank of
85 “China Wealth Fund Aims for Stability, Openness,” China Daily, October 16, 2007.
86 Xin Zhiming, “CIC Aims for Overseas,” China Daily, November 30, 2007.
87 “CIC to be Stable Force in Global Financial Market,” Xinhua, December 11, 2007.
88 “China Investment Co to Invest a Third of its 200 Bln USD ‘Cautiously’ — Official,”AFX
News Limited
, November 7, 2007.
89 SAFE’s webpage in English is: [http://www.safe.gov.cn/model_safe_en/index.jsp].
90 Leona Chen, “Will China Buy into BHP Billiton?” China Stakes, April 13, 2008.

CRS-16
Australia, and National Australia Bank — for $176 million per bank.91 A spokesman
for ANZ Bank indicated that SAFE had stated that SAFE’s share purchase was a
“portfolio investment” and “a better way of managing their exposure to the
Australian dollar.”92
In April 2008, SAFE made two major investments in the petroleum industry. On
April 4, 2008, the Financial Times reported that SAFE had accumulated 1.6% of
France’s Total for $2.8 billion in a series of smaller purchases spread over several
months.93 Eleven days later, Reuters reported that SAFE had also accumulated “just
less than 1%” of the British oil company, BP, through a similar process involving a
total investment of approximately $2 billion.94
SAFE’s recent forays into overseas equity investments have raised two major
issues among market analysts. First, some people are wondering if SAFE’s overseas
investments are a sign of dissatisfaction among China’s leadership with the
performance of CIC, or alternatively, an indication of institutional competition
between the PBoC and CIC.95 There is a report that the leadership of CIC is “furious”
about SAFE’s purchases of overseas equities.96 According to one analyst, SAFE’s
recent investments have blurred the distinction of responsibility between itself and
CIC.97
Second, there is uncertainty on how to interpret SAFE’s willingness to invest
in petroleum companies, given CIC’s previous assurances that it would not invest in
this potentially politically sensitive industry. Rumors that SAFE may be considering
an investment in BHP Billiton have given a modicum of credence to claims that
SAFE is willing to make more politically-charged investments that CIC has
forsworn.98 In November 2007, CIC denied market rumors that it was considering
making a bid to buy Rio Tinto to block BHP Billiton’s takeover bid.99
State Development and Investment Corporation
The State Development and Investment Corporation (SDIC) was established by
the State Council in May 1995 to function as a government-owned holding company
91 Tim Johnston, “Beijing Buys into Australian Banks,” International Herald Tribune,
January 4, 2008.
92 Ibid.
93 Richard McGregor, Peggy Hollinger, and Henny Sender, “China Uses Foreign Reserves
to Buy 1.6% Stake in France’s Total,” Financial Times, April 4, 2008.
94 “China Takes Stake in BP,” Reuters, April 15, 2008.
95 Ibid.
96 Alan Wheatley, “Tuft Wars Hobble China’s Financial Markets,” Reuters, April 28, 2008.
97 “SAFE, not CIC, Makes Strategic Move on France’s Total,” China Stakes, April 8, 2008
98 Leona Chen, op. cit.
99 “China Investment Denies Rio Tinto Bid,” Xinhua, November 27, 2007.

CRS-17
to invest in basic economic infrastructure.100 According to SDIC’s annual report for
2006, SDIC had 62 wholly-owned subsidiaries and holding companies with over
50,000 employees, 113.8 billion yuan ($16.3 billion) of total assets, making SDIC’s
the largest state-owned investment company in China. Up until recently, much of
SDIC’s investment was in power projects, especially electricity-generation facilities.
SDIC also has investments in port facilities, fertilizer production and financial
services.
On March 5, 2008, SDIC announced that it intended to “focus on overseas
investment and the financial sector in the next five years.”101 According to SDIC’s
general manager, Wang Huisheng, the company’s planned overseas investment in
2008 was 7 billion yuan ($1 billion), mostly in infrastructure construction and
resources-fueled industries.102
National Social Security Fund
In August 2000, China’s State Council and the Central Committee of the
Chinese Communist Party (CCP) created the National Social Security Fund (NSSF)
“as a strategic reserve fund accumulated by the central government to support future
social security expenditures.”103 The National Council for the Social Security Fund
(NCSSF) was also created to manage the NSSF’s assets. Capital for the NSSF is
derived from the proceeds from reduction of state-owned shares, fiscal outlays,
allocations made by the State Council, and returns on NSSF investments. Outlays for
social security purposes are jointly determined with the Ministry of Finance and
Ministry of Labor and Social Security. The NCSSF currently uses a number of
external fund managers to manage the NSSF’s investment decisions. The NSSF had
assets worth 516 billion yuan ($73.7 billion) as of the end of 2007, including $1.66
billion in overseas investments.104
In February 2008, Zheng Bingwen, a scholar at the Chinese Academy of Social
Sciences (CASS), one of China’s premier thinktanks, suggested that China create a
fund similar to Norway’s Government Pension Fund.105 According to Zheng, “CIC
has sparked a new round of the China investment threat theory and a new wave of
financial protectionism. We may hear fewer of those kinds of voices if we set up a
sovereign pension fund to make investments in developed countries.”106 While
Zheng’s comments were unclear about the relationship between his proposed
100 SDIC’s webpage in English is: [http://www.sdic.cn/en/index.htm].
101 “China’s SDIC Plans Overseas Investment,” Xinhua, March 5, 2008.
102 “SDIC Eyes Overseas Investment,” China Business News, March 6, 2008.
103 Quote from NSSF’s webpage: [http://www.ssf.gov.cn/enweb/Column.asp?ColumnId=35].
104 Charlie Zhu and David Lin, “China Needs Sovereign Pension Fund - Govt Scholar,”
Reuters, February 28, 2008.
105 Ibid.
106 Ibid.

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sovereign pension fund and the existing NSSF, he did suggest that the NSSF should
increase its overseas investments, with a focus on neighboring nations.107
Implications for China
Besides offering a new vehicle for managing its foreign exchange reserves, the
CIC is expected to help China sterilize some of its excess liquidity. In 2007, China
experienced a major inflow of foreign exchange due to its merchandise trade surplus
and the continuing stream of foreign direct investment. If the net inflow of foreign
exchange is not “sterilized,” the excess liquidity in China’s money supply may
contribute to domestic inflation or a speculative bubble in China’s domestic asset
markets (principally the real estate and stock markets).108
Prior to the creation of the CIC, China had been absorbing some of the excess
foreign exchange by issuing government bonds, and then purchasing foreign
government debt — much of it U.S. treasury bills — with the accumulated foreign
exchange.109 However, this was generating two economic forces considered
undesirable by the Chinese government. First, to attract the foreign exchange away
from its citizens, China was offering a relatively high rate of return on the
government bonds, raising the cost of “sterilization.” Second, because the rate of
return was relatively high, overseas investors were attracted to the Chinese bonds,
fostering an additional influx of foreign exchange. This influx of so-called “hot
money” placed more pressure on China to appreciate its currency when there were
already widespread claims that China’s renminbi was undervalued.110 Ironically, the
expectation that the renminbi would appreciate would tend to foster the inflow of
even more “hot money,” creating a potentially unstable speculative spiral.
In addition, China’s accumulation of U.S. debt in 2007 was not very profitable
given the appreciation of the renminbi (RMB) against the U.S. dollar. The yield on
10-year U.S. treasury bills fluctuated between 4.5% and 5.0% throughout the year.
However, since the beginning of 2007, the RMB has appreciated 6.0% relative to the
U.S. dollar. As a result, the effective rate of return on U.S. treasury bills valued in
107 Ibid.
108 “Sterilization” is a process by which a government absorbs excess foreign exchange in
circulation. One common method is by issuing government debt instruments in exchange
for the foreign exchange.
109 For more information on China’s accumulation of U.S. debt, see CRS Report RL34314,
China’s Holdings of U.S. Securities: Implications for the U.S. Economy, by Wayne
Morrison.
110 The name of China’s currency is the “renminbi,” or “people’s currency.” It is
denominated in units called “yuan.” On October 10, 2007, the exchange rate between the
renminbi and the U.S. dollar was 7.51188 yuan = $1.

CRS-19
Chinese currency was negative in 2007.111 When evaluated in its domestic currency,
China lost money on its investments in U.S. government debt in 2007.
The CIC offers a new avenue for the government to utilize the accumulated
foreign exchange and possibly earn a positive rate of return on its investments. The
sale of the “special treasury bonds” places the foreign exchange in the hands of the
CIC’s investors, who can then invest the capital in domestic assets other than real
estate or stocks, as well as foreign assets. In theory, this could reduce upward
pressures on China’s real estate and stock prices, lower China’s investments in U.S.
government debt, and generate positive yields on its investments in foreign assets.
Implications for Global Financial Markets and the
U.S. Economy
From a macroeconomic perspective, it is unclear how the arrival of the CIC will
affect global financial markets. From a microeconomic perspective, the critical issue
will be the types of investments the CIC makes. Furthermore, the entrance of CIC
has invigorated discussion of how sovereign wealth funds are regulated, and what
standards, or codes of procedure guide their operations.
Implicit in the creation of the CIC is a shift in China’s overseas portfolio away
from U.S. treasury debt into other assets. There has been some speculation that China
may be considering shifting most of its $1.5 trillion in reserves to the CIC — if it
manages its investments well.
According to some analysts, a shift in China’s portfolio away from U.S. debt
could put upward pressure on U.S. interest rates at a time when the Federal Reserve
is trying to lower interest rates to prevent a possible economic recession.112 With a
reported daily trade volume of existing U.S. debt of $600 billion,113a large divestment
of U.S. treasury holdings by China might also cause more severe market disruptions.
However, there would be little impact on the exchange rate between the renminbi and
111 For example, on January 1, 2007, the exchange rate was 1 yuan of RMB = 12.82 cents
of U.S. dollars. If China had invested 100 billion yuan in one-year U.S. treasury bills on
January 2, 2007, it would have been offered a return of 5.0%. After conversion into U.S.
dollars, China would have invested $12.82 billion. At the end of the year, China would have
been paid $13.461 billion by the U.S. Treasury for its investment. However, the exchange
rate at the end of 2007 was 1 yuan = 13.59 cents. So, after converting the U.S. dollars back
into RMB, China would have received the equivalent of 99.051 billion yuan for its
investment — a loss of 949 million yuan, or a -0.9% return on its investment.
112 For an analysis of the potential impact of a shift in foreign holdings of U.S. debt on the
U.S. economy, see CRS Report RL32462, Foreign Investment in U.S. Securities, by James
K. Jackson.
113 Liz Moyer, “Cornering the Bond Market?,” Forbes, September 28, 2006.

CRS-20
the U.S. dollar because China’s policy of keeping the exchange rate within a narrow
band.114
The arrival of a new investor with over $70 billion to invest is attracting the
interest of many major financial markets around the world. On October 26, 2007,
Mayor of London (England) John Stuttard met with CIC Chairman Lou in China to
lobby for the new SWF to set up a branch office in the City of London.115 On
November 22, 2007, Hong Kong’s Chief Executive Donald Tsang met with
representatives of the CIC in Beijing for similar discussions.116 In early December
2007, Lou traveled to London, Paris, and Singapore for additional talks about
possible CIC activity in those financial centers.
However, CIC’s Blackstone Group investment has made some observers wary
about the specific types of investments the new SWF will make. There is concern that
China may use the CIC to secure energy resources or purchase strategic assets for
geopolitical purposes. There are also market apprehensions that the CIC could seek
to increase its market share in important industries via targeted acquisitions or
takeovers. Others are concerned that CIC might make investments in particular
companies in order to obtain access to sensitive technology or information. These
various forms of possible strategic investments are fueling the calls for international
guidelines for SWFs, including China’s CIC.
Even if the investments of the CIC remain “purely commercial,” there are
already indications that the global financial markets may be ill-prepared for the
introduction of its $70 billion into the marketplace. Shares in the Hong Kong stock
market rose in October 2007 in response to rumors that the CIC had secretly invested
in Hong Kong stocks. There was a similar jump in the Tokyo stock market following
rumors that the CIC was considering investing in undisclosed Japanese companies.117
Plus, rumors in November 2007 that the CIC was a party to a consortium of Chinese
companies planning to bid on Australia’s mining company, Rio Tinto, led to a one-
day 7.5% rise in the share price of Rio Tinto and a 4.5% rise in the share price of its
other alleged suitor, BHP Billiton, despite repeated denials by CIC representatives.118
CIC continues to be mentioned as a possible party in rumored investments, including
stories linking CIC with possible investments in Australia’s Fortesque Metals Group,
114 For more information on China’s exchange rate policy, see CRS Report RL32165,
China’s Currency: Economic Issues and Options for U.S. Trade Policy, by Wayne M.
Morrison and Marc Labonte.
115 Mao Jilun and Li Weitao, “City of London Woos China Investment Corp,” China Daily,
October 26, 2007.
116 Carol Chung and Carrie Chan, “Stock Scheme on Agenda at Tsang Chat with PBOC,”
The Hong Kong Standard, November 22, 2007.
117 “Shares Rally on Signs of US Retail Strength,” Reuters, November 27, 2007.
118 “China Investment Denies Involvement in Alleged Rio Tinto Bid,” CNN, November 26,
2007; “China Investment Denies Rio Tinto Bid,” Xinhua, November 27, 2007.

CRS-21
Germany’s Dresdner Bank, and Sweden’s Nordea, a major financial services
group.119
There are also apprehensions about the potential for abuse or corruption created
by the greater proximity SWFs create between governments and the private sector.
As the existing investments of the CIC reveal, there is a growing network of
interlinked investments between banks and other financial firms within China and
overseas. Some U.S. financial analysts have expressed concern that CIC’s
investment in Morgan Stanley will provide the U.S. financial firm unfair preferential
access to China’s domestic financial markets. Others are worried that China will
place pressure on overseas financial firms in which it has invested to provide more
positive and optimistic assessments of China’s economic prospects and the financial
status of major Chinese companies courting international investors.
Multilateral Responses to SWFs
Misgivings about the potential impact of the CIC and other SWFs on financial
markets and local economies are fostering calls for multilateral organizations to
develop greater monitoring procedures and regulations of SWF investments. In June
2007, U.S. Treasury’s Assistant Secretary for International Affairs, Clay Lowery,
called on the IMF and the World Bank to develop guidelines for sovereign wealth
funds.120 Soon thereafter, the United States was joined by other G-7 nations121 in
asking the IMF to develop a set of “best practices” for SWFs to follow. In addition,
the Organization for Economic Cooperation and Development (OECD) is working
on a parallel project to provide recipient countries with suggested guidelines for
handling SWF investments as part of their ongoing “Freedom of Investment”
project.122 Also, individual nations are considering implementing laws and
regulations governing SWFs. For example, the Indian government is examining the
need for a special investment framework for SWFs because “even a trickle from
these funds could have huge ramifications for the Indian stock markets and the
economy on the whole.”123
119 “CIC, China Shenhua Plan to By 15.85% of Australia’s Fortesque,” China Business
News
, February 11, 2008; “China Sovereign Fund Denies Report on Dresdner Bank
Acquisition,” MarketWatch, March 27, 2008; and “CIC Interested in Buying Nordea’s
Stake,” China Business News, March 7, 2008.
120 Lynch, op. cit.
121 The G-7 nations are Canada, France, Germany, Great Britain, Italy, Japan, and the United
States.
122 For more information on the OECD’s “Freedom of Investment” project, see
[http://www.oecd.org/document/62/0,3343,en_2649_33783766_38760254_1_1_1_1,00.h
tml].
123 “Government Wakes Up after China Floats $200 Bn Fund,” The Economic Times,
November 22, 2007.

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IMF “Best Practices” Project
The IMF has responded to the calls of Lowery and others, initiating “a dialogue
among and with SWFs, with the goal of identifying best practices.”124 In November
2007, the IMF held a roundtable discussion on SWFs involving representatives of
key IMF members (including the United States) and several major SWFs (including
CIC). On February 29, 2008, the IMF released a “Work Agenda” on SWFs that “set
out ways to improve the Fund’s surveillance over the operations of SWFs” and
examines “the issues surrounding the development of a set of best practices which
would provide guidance on how to improve institutional arrangements,
organizational structures and risk management, and information dissemination
practices.”125 The report concludes with recommended “next steps” for the IMF
including the establishment of an international working group of SWFs to meet in
April 2008 to began drafting a set of best practices, with the goal of completing the
first draft by August 2008.126 On May 1, 2008, the IMF announced the formation of
the International Working Group of Sovereign Wealth Funds, comprised of
representatives of 25 IMF member countries, including China and the United
States.127 The OECD and the World Bank will participate as permanent observers to
the Working Group.
Chinese officials and CIC representatives of the CIC have been somewhat
critical of the IMF project and its implicit motivations. In January 2008, deputy
administrator for China’s State Administration of Foreign Exchange (SAFE) Wei
Benhua contrasted the financial arrangements of SWFs to those of hedge funds,
stating, “SWFs rarely make investment with leverage, and thus will not cause the
imbalance of the international financial system.”128 Wei went on to say, “The newly-
formed CIC, since its birth, has attracted lots of attention from the international
community. A few nations, on purpose, disseminate the argument of China’s
investment threat. The international community should clearly oppose different forms
of investment protectionism and financial protectionism.”129 In March 2008, CIC
executive vice president Wang referred to the G-7 proposal as “unfair.”130 Wang went
on to say, “The claim that sovereign wealth funds are causing threats to state security
and economic security is groundless. We don’t need outsiders to come tell us how
124 “Sovereign Wealth Funds — A Work Agenda,” International Monetary Fund, February
29, 2008.
125 Ibid.
126 Ibid.
127 “International Working Group of Sovereign Wealth Funds is Established to Facilitate
Work on Voluntary Principles,” IMF Press Release No. 08/97, May 1, 2008.
128 “China SWF: We Behave Better than Hedge Funds,” China Stakes, January 9, 2008.
129 Ibid.
130 Victoria Ruan, “China’s Investment Fund Pushes Back,” Financial Times, March 7,
2008.

CRS-23
we should act.”131 During an interview on CBS’s “60 Minutes,” CIC president Gao
said that the proposed IMF guidelines were “stupid” and would lead to “hurt
feelings.”132
Despite their apparent misgivings about the IMF project, China and the CIC has
indicated an interest in participating in the development of the “best practices.” In
addition to attending the November 2007 roundtable, China has also made public
statements supportive of the development of international standards for SWFs.
Minister of Foreign Affairs Yang Jiechi recently stated that “the good use of SWF
according to all international regulations should benefit all parties involved,” but also
noted that “all stakeholders should work together to make the rules.”133
OECD Guidelines for Recipient Countries
The OECD’s Investment Committee recently released its report, “Sovereign
Wealth Funds (SWFs) and Recipient Country Policies,” spelling out principles and
policy guidelines for “fair treatment of SWFs.”134 The report recommends that
recipient countries abide by five investment policy principles: (1) Non-
discrimination; (2) Transparency; (3) Progressive liberalization; (4) “Standstill”; and
(5) Unilateral liberalization. The report also contained a list of investment policy
guidelines for recipient countries, including:
! Similar treatment for similarly situated investors;
! Codification and publication of investment laws and regulations;
! Prior notification to changes in investment policies;
! Consultation on possible investment policy changes;
! Procedural fairness and predictability; and
! Disclosure of investment policy actions.
On the issue of “national security” concerns, the OECD Investment Committee
recognized that “each country has a right to determine what is necessary to protect
its national security,” but recommended that in making this determination, countries
should keep a “narrow focus” in their investment restrictions, use appropriate
expertise to make national security determinations, tailor their responses to the
specific risks posed by a proposed investment, and block investments only as a “last
resort” when national security-related concerns cannot be eliminated. The OECD
intends to release a final report on guidelines for investment policies for recipient
countries by mid-2009. The final report is to include a list of “best practices,” and “if
appropriate, suggestions for clarifications to existing OECD instruments.”
131 Ibid.
132 Video of Gao’s interview available at”60 Minute’s webpage:
[http://www.cbsnews.com/stories/2008/04/04/60minutes/main3993933.shtml].
133 “China Wants to Help Draft the SWF Investment Rules,” China Stakes, March 13, 2008.
134 “Sovereign Wealth Funds and Recipient Country Policies,” OECD Investment Committee
Report
, April 4, 2008.

CRS-24
In addition to developing investment policy principles and guidelines, the
OECD is holding regular meetings among its members to conduct peer reviews of
their investment policies.135 While the group does not have the authority to alter or
amend member investment policies, the presentations are subject to what Ervin
referred to as the “red face” test. In response to a question on the OECD’s
understanding of the meaning of “national security,” Ervin indicated that there is a
clear consensus that it included military risks, government procurement and “critical
infrastructure,” but also recognized that each OECD member had to make the
determination of what constituted a risk to national security. Ervin also stated that the
OECD thinks that members should strive to keep their definitions of national security
as narrow as possible.
Congressional Initiatives
Congress has already taken action regarding the monitoring and regulation of
foreign investment in the United States. The “Foreign Investment and National
Security Act of 2007” (P.L. 110-49) requires that the Committee on Foreign
Investment in the United States (CFIUS) investigate any foreign investment
transaction (including mergers, acquisitions, or takeovers) which results in “foreign
control of any person engaged in interstate commerce in the United States” or if the
transaction would result in foreign control of “critical infrastructure that could impair
the national security.”136 The new law also adds new criteria for CFIUS to use when
determining if an investigation is warranted, including whether the transaction is a
“foreign government-controlled transaction.”137 In addition, P.L. 110-49 increases
congressional oversight of CFIUS by requiring more detailed reports on its
operations and the results of its investigations. However, the authority to suspend or
prohibit foreign investments in the United States remains with the President.
Even with the passage of P.L. 110-49, some Members of Congress are
concerned that the new law may not sufficiently protect the United States from the
risks posed by the emerging SWFs. In a February 2008 letter to their fellow Senate
Banking Committee members, Chairman Christopher Dodd and Ranking Member
Richard Shelby indicated their willingness to consider appropriate legislation.138 In
an editorial opinion published in the Wall Street Journal, Senator Evan Bayh wrote,
135 Information obtained from an OECD Breakfast Series presentation by Carolyn Ervin,
Director for Financial and Enterprise Affairs, OECD, on April 11, 2008.
136 For more information about the Foreign Investment and National Security Act of
2007and CFIUS, see CRS Report RL33388, The Committee on Foreign Investment in the
United States (CFIUS)
, by James K. Jackson.
137 According to Section 2 of P.L. 110-49, “The term ‘foreign government-controlled
transaction’ means any covered transaction that could result in the control of any person
engaged in interstate commerce in the United States by a foreign government or an entity
controlled by or acting on behalf of a foreign government.”
138 Christopher G. Kelley and Robert J Burns, “Sovereign Wealth Funds, Corporate
Liquidity Problems, and the Foreign Investment and National Security Act of 2007,” The
Metropolitan Corporate Council
, March 2008, page 22.

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“... China’s drive for economic advantage — including rampant intellectual property
theft, currency manipulation, and subsidies for manufacture and export — raise
serious concerns about how sovereign wealth funds might be used.”139 Senator Bayh
also suggests that the CFIUS 10% review threshold may not be a sufficient standard,
and calls for the United States to implement a “passive investment” requirement on
SWF investments.140
Some commentators maintain that while P.L. 110-49 effectively dealt with the
national security risks posed by foreign investments, it did not adequately mitigate
against the economic security risks. In his November 14, 2007 testimony before
Senate Committee on Banking, Housing, and Urban Affairs, Truman mentioned that
“some observers” are concerned about the stability implications for the U.S. economy
and financial systems of SWF investments in “private equity firms, hedge funds, and
regulated financial institutions.”141 There have been suggestions that the United
States should prohibit a SWF from investing in the United States unless its home
nation meets certain criteria, such as those proposed by Truman and Garten.
On September 5, 2007, the House of Representatives passed H.Res. 552 (110th
Congress) by a vote of 401 to 4, which included a reciprocity requirement that
“United States financial service regulators, in assessing whether applications from
Chinese financial institutions meet comprehensive consolidated supervision
standards, should consider whether the applications are for operations and activities
in the United States that are currently prohibited for United States financial
institutions in China ...” However, others warn that such restrictions could lead to
a wave of financial protectionism that would cause undue damage to the U.S.
economy.
Since the creation of the CIC, Congressional committees have held several
hearings the SWFs in general. These include:
! Senate Committee on Banking, Housing, and Urban Affairs hearing,
“Sovereign Wealth Fund Acquisitions and Other Foreign
Government Investments in the U.S.: Assessing the Economic and
National Security Implications,” November 14, 2007;
! Joint Economic Committee hearing, “Do Sovereign Wealth Funds
Make the U.S. Economy Stronger or Pose National Security Risks?,”
February 13, 2008; and
! House Financial Services Subcommittee on Domestic and
International Monetary Policy, Trade and Technology, and the
Subcommittee on Capital Markets, Insurance, and Government
Sponsored Enterprises hearing, “Foreign Government Investment in
the U.S. Economy and Financial Sector,” March 5, 2008.
139 Evan Bayh, “Time for Sovereign Wealth Rules,” Wall Street Journal, February 13, 2008.
140 Ibid.
141 Edwin M. Truman, “Sovereign Wealth Fund Acquisitions and Other Foreign Government
Investments in the United States: Assessing the Economic and National Security
Implications,” Testimony before the Committee on Banking, Housing, and Urban Affairs,
U.S. Senate, November 14, 2007.

CRS-26
In addition, the U.S.-China Economic and Security Review Commission142 held a
hearing, “The Implications of Sovereign Wealth Fund Investments for National
Security,” on February 7, 2008.
On February 27, 2008, Representatives Jim Moran and Tom Davis announced
the formation of a “new bipartisan task force to explore sovereign wealth funds
(SWF).”143 According to a press release from Representative Moran’s office, the
SWF task force “will study issues surrounding SWFs including their potential to
affect geopolitics, and the U.S. and international economy.”The SWF task force
includes designated members from the House Ways and Means Committee and the
House Financial Services Committee.
Congressional Considerations
The initial reaction of the Bush administration to the CIC’s creation was
generally favorable. President Bush reportedly said that he was “fine” with foreign
investors buying shareholdings in U.S. banks and financial firms.144 U.S. Treasury
Undersecretary for International Affairs David McCormick commented the
investments of SWFs have “largely been long-term, very commercially focused, and
very stable,” but also indicated that more transparency and governance was needed.145
To that end, the Bush administration has been pushing the IMF to develop a system
of best practices for SWFs.146
As previously mentioned, P.L. 110-49 broadened the investigatory authority of
CFIUS in cases of national security risk, and increased the committee’s reporting
requirements to Congress. However, there have been suggestions that the recent
changes do not adequately protect the United States from economic risks posed by
SWFs. These potential economic risks are seen as including financial market
instability, undesirable foreign control or influence over key industries or companies,
access to sensitive technology, and other forms of unfair competitive advantages.
Among the regulatory changes being suggested are:
142 The Commission was created on October 30, 2000 by the Floyd D. Spence National
Defense Authorization Act for 2001 (P. L. 106-398, as amended by P.L.109-108). The
commission is to focus its work and study on eight areas: proliferation practices, economic
transfers, energy, U.S. capital markets, regional economic and security impacts, U.S.-China
bilateral programs, WTO compliance, and the implications of restrictions on speech and
access to information in the People’s Republic of China.
143 “Moran Unveils Sovereign Wealth Funds Task Force,” press release, Office of
Representative Jim Moran, February 27, 2008.
144 Michael Richardson, “Barriers to Trust: Sovereign Wealth Funds Must Become More
Transparent to Avoid Causing Alarm,”South China Morning Post, December 29, 2007.
145 Ibid.
146 Francis, op. cit, and Lynch, op. cit.

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! Requirements that any SWF interested in investing in the United
States publicly release audited financial statements that follow
international accounting standards on a regular basis;
! Restrictions on the percentage of a U.S. company an SWF may own
— other nations have such limits; for example, Hong Kong may
withdraw the authority of Standard Chartered Bank to issue Hong
Kong currency if the share of its stock owned by a Singaporean SWF
exceeds 20%; and
! Restrictions on the type of investment SWFs may make in U.S.
companies — alternatives include restricting SWFs to the purchase
of nonvoting shares, banning SWFs from negotiating a seat on the
company’s board of directors or representation in the company’s
senior management.
In addition, there have been suggestions that access to U.S. financial markets should
be contingent on the successful conclusion of a reciprocity agreement that would
allow U.S. banks and financial institutions comparable access to the other nation’s
investment and financial markets.
However, some commentators are concerned that increasing the regulatory
review of SWFs will precipitate a period of financial protectionism.147 The issue is
whether the value of protection obtained outweighs the forgone benefits of
investments prevented in a more restrictive global financial market.
147 Truman, op. cit.