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Chinese investment fund to focus on state banks

China has announced strategic plans for its new US$200 billion investment fund, saying two-thirds of the fund will be invested in Chinese state banks and it will avoid buying into foreign oil, airline or telephone companies.

The comments by a finance ministry official, reported yesterday by state media, appeared to be aimed at easing potential foreign opposition to the fund. Critics have questioned whether such state-run funds will be used to promote government policy and whether they should be barred from investing in sensitive industries.

China Investment Corp (CIC, 中國投資公司) will invest "gradually and in a cautious way," Chinese Vice Finance Minister Li Yong (李勇) said at a conference in Beijing, Xinhua news agency reported.

"CIC would not buy into overseas airlines, telecommunications or oil companies," Xinhua said, citing Li.

It said he rejected "rumors that China would try to buy out European and American companies in large numbers."

Beijing created the company, which overnight became one of the world's biggest investment funds, to pursue better returns on China's US$1.43 trillion in reserves. A majority of its reserves are now held in US Treasury securities and other safe but low-return instruments.

One-third of CIC's money will be invested abroad, while another third will be used to buy Central Huijin (中央匯金), an agency that controls China's state-owned banks, Li said.

The remainder of CIC's money will be used to replenish the capital of the Agricultural Bank of China (中國農業銀行), a state-owned lender with a backlog of unpaid loans, and the China Development Bank (中國開發銀行), a noncommercial state agency, the reports said, citing Li.

"Anybody who's been investing in banks from the outset of the reform process has made quite a return, whether foreign investors or the government," said Charlene Chu, an analyst in Beijing for the credit agency Fitch Ratings.

"But I don't think ultimately that profit is what is driving the government here," she said.

"This certainly is a broader desire to clean up the banking system," she said.

The fund's first major deal was a US$3 billion purchase of a stake in the US investment fund Blackstone Group LP.
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