China SWF.pdfVIP

China World Economy / 101 116, Vol. 17, No. 1, 2009 101 China s Sovereign Wealth Fund: Weakness and Challenges M ing Zhang, Fan He* Abstract The establishment of sovereign wealth funds in large developing countries has generated hot debate among pa rticipa nts in the internationalfi nancial market. When accumulated f oreign exchange reserves surpa ss a suffi cient and an appropriate level, the costs, risks and impa cts of holding reserves on the macroeconomy of a country need to be considered. The Chinese Government established China Investment Corpo ration CI C i n 2007 to diversify its investment of f oreign reserves and to raise investment income. H owever, because of certain conf licts of interest and institution-desig n caveats, CI C p ossesses some internal weakness, includ ing a vague orientation, mixed investment strategies and an ineff icient bureaucratic sty le. A lthough the subp rime crisis has sof tened certain regulations and lessened rej ection by the USA of CI Cpo tential investments, the increased volatility and uncertainty of the market means that CI C isf acing some new challenges in terms of its investment decisions. Moreover, CI C is comp eting with other Chinese investment institutions f or inj ections of f unds from the Chinese Government. Key words: China Investment Corporation, external challenge, foreign exchange reserve management, internal weakness, sovereign wealth fund JEL codes: F21, F55, H11 I. Introduction China established its own sovereign wealth fund SWF , the China Investment Corporation CIC , on 29 September 2007. With an initial capital fund of US$200bn, CIC fast became one of the most prominent SWF in the world. Since its initiation, CIC has aroused suspicion and * Ming Zhang, Assistant Pr ofessor, In stitu te of World Economics and Politics, Chinese Academy of Social Sciences, Beijing, China. Email: zhangyuxuan@; Fan He, Associate Professor, Institute of Wor ld Economi cs and Pol iti cs,