Handling the hot potato

The presumed next leader of China’s sovereign wealth fund may look inward for growth

Handling the hot potato

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“Tu Guangshao handed RMB165.5 billion hot potato,” read one story that pinged around the internet on Monday. The headline referred to the Shanghai vice mayor tipped to lead China Investment Corporation (CIC), the country’s largest sovereign wealth fund, being handed a portfolio that includes stakes in five securities firms with US$27 billion (RMB165.5 billion) in assets under management.

Although still not officially confirmed, it has been widely reported that Tu will take over as chairman of CIC. Most of the foreign press coverage has focused on CIC’s role in investing a major portion of China’s US$3.2 trillion in foreign exchange reserves overseas. The US$482 billion fund has made many high profile investments, such as one in London’s Heathrow Airport last year.

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

The Chinese business news magazine Moneyweek detailed in a report on Monday how Huijin may be the place where Tu’s influence is actually felt the most. (Although the original article is not available through Moneyweek’s website, the same story ran on several other Chinese news sites under the more salacious “hot potato” headline.)

Tu would be under pressure to keep profits up at CIC as the fund has seesawed between gains and losses since its inception in 2007. His strong background in securities may be just what CIC needs to get the most out of Huijin and achieve the high returns Beijing wants. While Huijin operates with a degree of autonomy, outgoing CIC leader Lou Jiwei brought power over many decisions about Huijin under his control, the Moneyweek story reports.

Previous heads of CIC and Huijin have usually come from a more general political or finance background, rather than securities. For instance, Lou, who recently left to become minister of finance, was previously governor of Guizhou as well as a vice minister of finance.

Tu by contrast is a securities wonk. In the 1990s, he rose from managing securities trading systems for the People’s Bank of China and the China Securities Trading System, electronic exchange operator, to head the trading department at the to securities regulator China Securities Regulatory Commission (CSRC) and ultimately led that agency. He then headed the Shanghai Stock Exchange before becoming a vice mayor of Shanghai.

That securities experience could be vital in his role overseeing Huijin. The investment fund has pushed to list the banks and other institutions that it holds a stake in, while neglecting to do the same for its securities firms.

Huijin has already successfully brought many of the 19 firms it holds major stakes in 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.

Publicly listing is an important step to spelling out Huijin’s role as a sovereign fund. Huijin, like any fund, should merely be seeking to maximize returns for its backers, in this case the government. But because the government ultimately holds the purse strings, Huijin is widely seen as sharing Beijing’s goal of preserving stability. By listing, the companies it holds have a legal obligation to shareholders to maximize returns, which should help ensure it doesn’t make bad investments in the name of ensuring stability.

Unlike Huijin’s bank and insurance holdings, its 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 (RMB165.5 billion) under management, as mentioned in the Moneyweek story, among other unlisted investment and securities firms.

Listings have only just begun with subsidiary China Galaxy Securities slated to IPO in Hong Kong today. Tu could use his expertise to help list the other securities firms in attempt to bolster Huijin’s, and thus CIC’s, returns.

The pressure on Tu to maximize returns for CIC will likely increase as China can no longer count on its foreign exchange reserves to grow. Chinese export growth appears to have hit a plateau, and imports are expected to catch up, narrowing the country’s trade surplus. In the meantime, Beijing will surely seek to maximize the bang for its buck with its currently massive foreign exchange reserve.

Given these trends, CIC itself may turn into a hot potato. Listing the securities firms may help Tu juggle it and forward his political career, as history shows the head of CIC is generally being groomed for better things. If he manages CIC well through the current transition in the Chinese economy, he may be handing off the hot potato soon enough.