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.