CIC AND SAFE: SHANGHAI FINANCIAL INDUSTRY VIEWS, LATE MAY

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E.O. 12958: N/A
TAGS: EFIN ECON PGOV CH
SUBJECT: CIC AND SAFE: SHANGHAI FINANCIAL INDUSTRY VIEWS, LATE MAY
2008


1. (SBU) Summary. Visiting Department economic analysts and
Congenoff (Econoffs) met May 21-23 with Shanghai financial
industry participants and regulators to discuss China's capital
market development and sovereign wealth fund issues. Most of
the interlocutors agreed that the State Administration of
Foreign Exchange (SAFE) is likely to play a more active role in
investing China's foreign exchange reserves outside of U.S.
Treasury bills, putting it in competition with China Investment
Corporation (CIC) as the Chinese Government's primary vehicle
for diversifying investment outside of dollar-denominated
assets. They were also confident that both the CIC's and SAFE's
primary investment criteria would be high returns rather than
promotion of other non-financial strategic objectives. End
summary.

Introduction


2. (SBU) In meetings from May 21-23, Econoffs met with
Shanghai financial experts to discuss China's capital market
development and sovereign wealth funds. Participants included
an American investor and management consultant with over 20
years of experience doing business in China; an American
financial consultant with expertise on sovereign wealth fund
issues; Deputy Director-General of Statistics and Research Liu
Mingzhi and Director-General of the International Department Luo
Yang from the PBOC's Shanghai Head Office; a Citibank Managing
Director; and former Morgan Stanley Chief Asia Economist Andy
Xie.

China Sovereign Wealth Fund Management and Goals


3. (SBU) These several interlocutors downplayed or even ruled
out the possibility that CIC might use foreign exchange reserves
to promote non-financial strategic objectives. The management
and financial consultants suggested that highly professional
fund managers at CIC would base investment decisions on returns.
Xie, however, suggested that bureaucratic incompetence and
corruption would handicap CIC's ability to realize such returns.
The management consultant noted that this does not rule out
possible CIC investments in sensitive areas such as Iran or
Venezuela. Nearly all also cited China's inadequate social
safety net, particularly with respect to pension obligations,
and the declining value of foreign exchange reserves, primarily
in dollar-denominated assets, as the main reason for the
creation of the CIC.


4. (SBU) The financial consultant expects CIC will be a
passive investor, confining itself to purchasing indexes and
stakes below 10 percent of issued shares This will allow CIC to
quickly invest its $200 billion into a diversified and balanced
portfolio. He expects CIC will use Norway's Government Pension
Fund as a model. This, as well as public comments made by CIC's
Managing Director, Gao Xiqing, suggest a commitment to
transparency, which he notes will become more apparent as CIC
makes more investments. Xie, however, believes the CIC invests
passively because its investment managers do not have the
experience or expertise to make larger equity investments
outside of financial institutions. He co