There was a widespread assumption among practitioners and academics that the China Investment Corporation would receive $200 billion in the early part of 2010 from the State Council to fund ongoing overseas investments. Indeed, the CIC invested almost all of its international portfolio in 2009, leaving it very little cash to work with. If granted, the CIC would become the biggest SWF in the world!
But, as so often occurs, assumptions are just that…and this one was wrong. It turns out that the CIC’s request for $200 billion was flat out rejected by the State Council. But since the CIC is almost out of capital, it quickly submitted a new proposal to the State Council, paring down the amount to $100 billion.
This proposal is currently under consideration. As is the request from the CIC’s subsidiary Central Huijin for roughly $28 billion to bolster under-capitalized domestic banks (and avoid dilution of state interests).
According to an article in China Stakes,
“The proposals from CIC and Huijin are making their way through the approval procedure, and have stirred debate among the related departments inside the State Council. CIC before tried to get US$200 billion more from the Ministry of Finance but failed.”
What’s going on here? I thought China was desperate to invest and diversify its $2.4 trillion in foreign reserves (which, by the way, represents roughly 30% of the world’s total). Isn’t the CIC just the vehicle to achieve this diversification? So, why did the CIC get turned down for the $200 billion? And why is the $100 billion such a problem?
An article in the Economic Observer might offer some insights. According to some academics in China, the hurdle rate for the SWF was simply too high:
“Given its registered capital was raised by the issuance of special treasury bonds at a fixed interest rate of 4.5 percent per annum, the CIC now faces huge pressure to pay back the capital…considering the bonds’ high annual interest rate and an 8 percent appreciation rate of the Renminbi per year, CIC had to keep its rate of annual return at above 13 percent; otherwise, the MoF would face financial losses.”
This is an incredibly high (!) hurdle rate. I too would be skeptical about giving any investor capital if they needed to return above 13% before I made money. Nonetheless, the CIC has been pretty savvy over the past two years, so perhaps even this high hurdle rate is achievable.
What is a hurdle rate among friends?