What’s Behind China’s Sovereign Wealth Fund Executive Changes?

March 03, 2015 by Loch Adamson

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Fan Yifei, executive vice president, deputy chief operating officer and executive committee member of China Investment Corp.

Some prominent executive shuffling at China Investment Corp. prompts questions about a government-sanctioned power grab. Others say it’s just smart business planning.

Last week the People's Bank of China (PBoC), the country's central bank, appointed Fan Yifei, executive vice president, deputy chief operating officer and executive committee member of China Investment Corp. (CIC), as its new vice governor. The move has China’s sovereign wealth fund experts talking.

To be sure, Fan is no celebrity. "Kind of a blank," is how one Beijing-based consultant described him. "He has written no significant speeches or policy papers and is a lifetime banker with a focus on internal processes and risk controls," this person added. Fan’s appointment was part of a broader reshuffle of PBoC officials that observers say highlights the central bank's lack of independence from the ruling Communist Party of China.

Yet Fan is the second CIC executive committee member in recent months to have been moved to a senior post at another Chinese government-owned institution. In October 2014, the government named Ding Xuedong, the CIC’s chairman and CEO, as chairman of Beijing-based China International Capital Corp., the country's oldest investment bank.

CIC has a high staff turnover — much to the frustration of many of its outside asset managers who must deal with a constantly rotating roster of counterparts. From the outside, what seems like the latest poaching of the fund's senior executives suggests the $653 billion fund is becoming less important in the country's overall economic and financial strategy.

Instead, its role is being taken over by the $456 billion State Administration of Foreign Exchange (SAFE), a PBoC department that also invests some of China's multi-trillion-dollar foreign exchange pile in foreign assets. Since 2012 it has become more aggressive in its overseas investments.

New Governor

Others think that is reading too much into the moves. Christopher Balding, associate professor at the HSBC Business School of Peking University Graduate School, says that shifting personnel between what are essentially two departments of the Chinese government is relatively common. "Working for the Chinese government is similar to working for a large company," he says. "Key personnel are frequently shuffled between different geographic and strategic departments and CIC should be considered little more than a department where key personnel rotate into and out of."

This modus operandi makes it difficult to compare CIC to state-owned peers. For example, Singapore’s GIC or the Korea Investment Corp., essentially operate independently, while remaining under the control of their respective governments.

Ivan Shi, head of research at Shanghai-based consulting firm Z-Ben Advisors, says he suspects that Fan’s appointment to PBoC has less to do with any rivalry between CIC and SAFE over the management of China’s foreign exchange reserves and more to do with the possible top level changes at governor later this year. "There has been speculation for a while that Shandong Province governor, Guo Shuqing, the former China Securities Regulatory Commission chairman, may be appointed as the new PBoC governor," he says.

Shi says that Fan’s appointment as PBoC vice governor "may be a necessary preparation for Guo’s appointment, as both served in the senior management team of China Construction Bank between 2005 and 2010."

Real Rivalry

Both Balding and Shi say CIC provides valuable experience and skills to other government departments. Balding underscores that while CIC executives have been moved out, these could ultimately be considered promotions. "They are subsequently being given key positions rather than hidden in backwater postings," he says, adding that where these people move afterwards is key to understanding the personnel changes.

There were rumors in January that Fan might also become the new head of SAFE, according to Shi, despite his relatively low profile. "If that is the case," he says, "I believe Fan can bring his experience in CIC into SAFE, potentially better structuring SAFE’s foreign investment office."

Various Chinese officials have complained that managing SAFE’s foreign-currency reserves is expensive, according to Shi. The central bank department will have to respond by making the management of its offshore investments more efficient. Shi thinks that Fan’s tenure as CIC’s deputy COO could provide him with the kind of experience necessary to succeed at the task. CIC is notoriously parsimonious when it comes to paying management fees.

In this tea-leaves-reading exercise, CIC isn’t being sidelined, according to Balding and Shi. Still, the question remains as to why CIC’s funding from SAFE has apparently dried up, even as the latter has become more aggressive in its overseas investments.

Increasing Risks

SAFE now invests directly on foreign stock exchanges. It owns almost 3 percent of reinsurer Münich Re and almost 2 percent of Royal Dutch Shell, for example — and has major interests in European properties, including such office complexes as Drapers Gardens office in the City of London and Adlerwerke in Frankfurt. SAFE has also branched into renewable energy infrastructure, buying a 49 percent stake in Wind U.K. Invest, a portfolio of three onshore wind farms, from Norwegian state-owned electric company Statkraft.

Balding says rivalry between the two state-owned investors is very real, but doesn’t think that is responsible for SAFE’s curtailing of funding for CIC. He points out that people forget that the rivalry between the Ministry of Finance and the PBoC meant that CIC was not formed with a simple cash transfer but by the issuance of 10- and 15-year bonds carrying annual interest rates of 5 percent.

This effective hurdle is difficult for CIC to clear, particularly given that for its first two years the fund held more than 80 percent of its international portfolio in low-yielding fixed-income securities. With the government engineering a weaker renminbi, the hurdle is in effect rising. Balding says that means channelling more cash to CIC is increasingly risky for the government.

The dynamics of China’s sovereign wealth funds are different from those of its peers. CIC’s and SAFE’s foreign investments are, more than most other state-owned savings funds, driven their government’s strategic and macroeconomic policies. Moreover, unlike many other sovereign wealth funds that seek to separate themselves from national economic policies, CIC and SAFE embrace their role in executing the government’s agenda.

Each plays a function in training and fostering officials that will shape the country’s future. Asset managers, bankers and other fund counterparties ignore the politics at their own peril.

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