Sovereign fund spin-off 'considered'

CIC move seen as 'sidestepping' investment restrictions

BEIJING - Chinese author-ities are considering a plan to strip China Investment Corporation (CIC) of all its domestic banking stakes, a move expected to help diversify the portfolio of one of the world's major sovereign wealth funds, industry sources said on Tuesday.

Total banking shares held by CIC were reportedly valued at $70 billion when it was established in 2007, including large shareholdings in Bank of China and the Industrial and Commercial Bank of China. CIC, responsible for managing part of the country's foreign exchange reserves, saw its assets grow to $298 billion at the end of 2008.

Central Huijin, a wholly owned subsidiary of CIC, currently holds the banking stakes.

It is unclear whether CIC will be recompensed for the stripping of the holdings.

But sources close to the matter told China Daily that if the spin-off succeeds, Central Huijin may be either directly controlled by the State Council or acquired by the State-owned financial assets supervision and administration commission, a new government agency that Beijing plans to set up.

Wang Qishan, the vice-premier in charge of finance, is championing the proposal, the London-based Financial Times cited unnamed bankers as saying.

Many analysts see the plan as a move by the country to free CIC from certain restrictions when it invests overseas, particularly in the United States market.

The move is also expected to widen CIC's overseas investment portfolio and help diversify investment risks.

CIC is now considered a bank holding company by US financial regulators and is restricted from investing in US security brokerages, insurance firms and other businesses that are open to financial holding companies in a broader sense. The fund invests mostly in banking and non-financial businesses such as energy.

CIC's investments in the US have been under tough regulations due to distrust by local regulators toward sovereign wealth funds and political reasons, although CIC has repeatedly asserted that its investments are commercial.

The sovereign wealth fund drew fierce criticism at home for its steep losses from investments in US financial institutions, including Morgan Stanley and private equity firm Blackstone, sources told China Daily.

The latest move may help CIC diversify risks but it will hardly change its image as a State-owned investment fund, analysts said.

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"It might help to some extent, but the spin-off is not going to change its image as the sovereign wealth fund endorsed by Beijing," said Li Xiaogang, director of the Foreign Investment Research Center at the Shanghai Academy of Social Sciences.

The spin-off is also unlikely to have a major impact on the country's State-owned lenders as the stake transfer will take place within the control of the central government, banking analysts said.

"It is like the government changing assets from the left hand to the right hand," said Qiu Zhicheng, a Shanghai-based analyst at Guosen Securities.

Other sources close to the fund earlier indicated that CIC is shifting its investment strategy to focus more on short-term returns and securities with relatively high liquidity, due to the recent volatility in the global equity markets.

Recent stock market corrections in the US and Europe caused a 10 percent mark-to-market loss for the fund in May and June, CIC's Executive Vice-President Jesse Wang said.

But the company is still considering expanding its overseas investments as it is seeking a capital injection of $100 billion from the central government, Chinese media reported.