Why Does Nobody Want China’s Top SWF Job?

(May 28, 2013) – China’s $500 billion sovereign wealth fund is reportedly struggling to fill its head position due to the pressure of handling what the Chinese press are calling ‘the hot potato‘.

Previous media reports had suggested Tu Guangshao, Shanghai’s vice-mayor and a man who has a strong background in securities management, had been cast as the shoe-in replacement for the outgoing chairman of the China Investment Corporation (CIC) Lou Jiwei.

But it appears the former Bank of China and Shanghai Stock Exchange employee is now reluctant to take the top job.

The Financial Times reported that the position had already been offered to two other candidates, including Yi Gang, a central bank deputy governor, who both declined the post. Now Tu is also considering rejecting the position, according to the FT report.

So why the change of heart? The reference to the $500 billion pot being a hot potato in the Chinese press is two-fold; firstly many believe the CIC may end up being something of a poisoned chalice after it scattered its investment seeds far and wide since its establishment in 2007.

Two of CIC’s earliest investments – stakes in Morgan Stanley and private equity firm Blackstone – have already resulted in big paper losses following the eruption of the global financial crisis in 2008.

Whoever takes on the chairman role will come under pressure to maximize returns for the CIC, especially given China can no longer count on its foreign exchange reserves to grow. Export growth appears to have stalled, and imports are expected to catch up, narrowing the country’s trade surplus.

The secondary issue, which is less covered in the Western press, is that the CIC also plays an important role as the parent company to Central Huijin Investment, the branch of the fund responsible for investing in domestic companies.

As China Economic Review points out, Huijin, which predates CIC but is now a subsidiary, is of nearly equal importance as the fund’s international investment branch, having received $90 billion of the initial $200 billion given to CIC on its founding in 2007.

Huijin has pushed to list the banks and other institutions that it holds a stake in, but it has failed to do the same for its securities firms.

The investment branch has already successfully brought many of the 19 firms in which it holds major stakes to IPO, a move seen as maximizing its returns on those investments. Those include big names now listed in both the mainland and Hong Kong, including banks like China Construction Bank, Bank of China, Agricultural Bank of China and insurer New China Life Insurance.

Huijin’s securities firms remain largely unlisted. That includes the five securities firms – Shenyin & Wanguo Securities, China International Capital Corporation (CICC), China Securities, China Investment Securities, UBS Securities – with US$27 billion under management. It was hoped Tu could use his expertise in securities to list these companies, therefore encouraging greater returns from them through additional shareholder pressure.

Tu was also favoured given his cultivation of Shanghai’s international relationships during his six years in charge of the city’s finance, taxation, and external affairs. He has liaised publically with Australia’s foreign minister, Singapore’s consul-general, the deputy-mayor of Paris, and the grandson of former US President Richard Nixon.

Perhaps the real reason Tu is feeling less confident about the role is driven by the fact CIC is no longer the super investment power it once was.

The Chinese central bank has created a de facto sovereign wealth fund out of the State Administration of Foreign Exchange (Safe), the body which manages the country’s $3.4 trillion stockpile of foreign currency holdings.

Over the past five years Safe has carved off more cash to invest in stocks, property, and private equity funds, covering much of the same territory as CIC.

And the same central bank is the main source of funding for the CIC. Perhaps the job isn’t as attractive as we first thought.