Chinese whisper over CIC turf wars

The $300 billion China Investment Corporation (CIC) aims to sidestep official barriers to investing in the US by offloading its stakes in home-country banks.

The proposal would see the sovereign wealth fund (SWF) relinquish responsibility for the Chinese government’s majority stakes in the country’s largest banks, such as Bank of China, the Financial Times reported. The move would also end CIC’s status as a bank holding company in the eyes of the Federal Reserve.

This would free the CIC of certain restrictions – such as having to register with the Board of Governors of the Federal Reserve System and other measures constraining all US bank holding companies – when it makes investments in the US, where it is understood to be eyeing equities, bonds and real estate investments.

When the CIC was established in 2007, its stakes in domestic banks were valued at $70 billion, but it is not known if the bank will be recompensed for these holdings if it offers them up.

If the fund is paid for the shareholdings, its cash reserves will almost double, providing a lot of firepower for new investments but stripping it of future dividends – a reliable source of returns when many of its investments are too immature to outperform.

The FT cited unnamed bankers to assert the proposal was backed by Wang Qishan, the vice-premier in charge of finance.

The CIC was originally set up to invest China’s amassed foreign exchange reserves overseas, but became a key player in the country’s banking system when it took over Huijin, a holding company owning the government’s shares in big domestic banks.

This was seen as a coup for the finance ministry, since the creation of Huijin in 2003 was interpreted as a power grab by China’s central bank to curb the ministry’s power over the nation’s lenders and state-owned insurance companies.

Some senior policymakers in Beijing are believed to be pressuring for Huijin to be spun out of CIC and given ownership of the government’s stakes in financial groups.

Given these internal forces, some observers believe any restructuring of the CIC would more likely be attributed to domestic turf wars rather than gaining easier access to US markets.

Meanwhile, the CIC and AES Corporation, a global power generation and distribution business headquartered in the US, announced their proposed wind power joint venture in the US had been shelved. But AES stated its discussions with the CIC may resume as emerging US renewable energy legislation becomes clearer.