In the coming months, the Chinese government is expected to inject another $200 billion into its sovereign wealth fund, the China Investment Corporation (CIC), bringing the fund's total capital base up to half a trillion dollars. This massive infusion of cash would make the CIC, which was only launched in 2007, one of the largest sovereign wealth funds (SWFs) in the world -- potentially ahead of long-established funds from Abu Dhabi, Kuwait, Norway, and Singapore.
The rapid ascent of the CIC proves that, despite the global financial turmoil, China's economic power is intact. In 2009, China may have supplanted Japan as the world's second-largest economy and edged past Germany as the world's leading exporter. Meanwhile, the country's foreign exchange reserves have continued to set records, recently reaching $2.4 trillion, almost all of which has been accumulated during this millennium.
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In fact, rather than stemming the CIC's growth, the global financial crisis has had a profoundly positive effect on China's SWF. Although the fund struggled to overcome a series of managerial, financial, and geopolitical hurdles upon its creation, the financial crisis set the stage for a remarkable transformation. Now, the fund has matured into perhaps the world's largest and most influential strategic investor.
The CIC was unprepared for its mission in 2007, losing money hand over fist in the first year of its existence. Its investments in financial institutions were particularly poorly timed. In 2007, the CIC made high-profile investments in Blackstone and Morgan Stanley that were quite embarrassing for the fund, highlighting to some their naiveté. By the end of 2008, these investments were down 80 percent and 67 percent, respectively. This loss, though only on paper, engendered domestic debates about whether the CIC should even exist.
The CIC, and sovereign wealth funds in general, were also facing increasing skepticism in the West due to fears that it blurred the line between finance and politics. At the time, many worried that these types of funds would be used illegitimately to advance political and nationalist, as opposed to commercial, agendas. For example, some policymakers in Washington worried that the CIC was concealing attempts by the Chinese government to obtain technology, resources, or expertise to benefit national strategic interests. In the words of one U.S. Senate staffer who we interviewed, "What happens when you unleash communists into free market capitalism?"
This skepticism led several countries to consider new protectionist policies. At the time, Australia, Canada, France, Germany, Italy, the European Union, and the United States were all mulling new policies to constrain SWFs' access to their markets. The stakes were, thus, very high, as any new protectionist policies in the West would have had a significant impact on these funds' ability to invest in these markets and fulfill their objectives.
Back in 2007, there was also considerable skepticism regarding the ability of the CIC, and SWFs more generally, to manage money effectively. Indeed, in our survey of sovereign wealth funds' own asset managers, we found that most of the respondents thought that the funds' internal resources were not up to the requirements of a global asset manager. Specifically, asset managers believed that the funds' investment capabilities could be greatly improved. There was also a widespread perception that SWFs were being taken advantage of by money managers and investment bankers; the CIC's 2007 investments are perhaps illustrative of this. Finally, many felt SWFs weren't able to attract the necessary talent to be successful. Our friend Keith Ambachtsheer, professor of finance and director of the Rotman International Centre for Pension Management at the University of Toronto, actually called these funds "accidental financial tourists." Simply put, 2007 was a difficult year for SWFs in general, and many viewed the CIC as the poster child of what went wrong.
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