Tuesday, March 02, 2010

Chinese Sovereign Wealth Fund Investing Under the Radar: Central Huijin's Operations in the last half of 2009

I have been suggesting that emerging patterns of sovereign wealth fund behavior incorporates an enterprise model.  Sovereign wealth funds are at their lest effective--and most transparent, when they operate as single entity investment vehicles.  China has been among the most successful at starting to re-arrange their sovereign investing on more sophisticated--and potentially less transparent (and accountable) --basis.  Operating on an enterprise model, the Chinese sovereign wealth fund, China Investment Corporation, has been able to diversify its operations, serve as a stronger vehicle  to  effectuate of state policy through targeted market interventions and make such interventions in overseas markets more palatable to increasingly nervous states.

I have recently described the direct investing of the China Investment Corporation in the last half of 2009.  See Larry Catá Backer, China's Sovereign Wealth Fund's Operations August 2009 Through January 2010: The ActionPlans of Sovereign Activity in Private Markets, Law at the End of the Day,  Jan. 23, 2010. 

I have had my research assistant, Siyu Zai (Penn State Law 2011) look to the investment and other activities of China Investment Corporation's most significant subsidiary, Central Huijin. Investment, Ltd.   What emerges is not merely an interesting investment strategy, but one that seeks to unify and simultaneously maximize the financial return to Central Huijin and the conformity of that investment to key foundational government policies--in this case Hu Jinatao's scientific development of society through  harmonious society (和谐社会) principles, now turned through investment to the furtherance of state policy.  Her report follows:

Summary of Central Huijin’s Activities throughout the Second Half of 2009

Central Huijin Investment Company, one of CIC’s wholly owned subsidiaries, makes equity investments in major state-owned financial enterprises and, to the extent of its capital contribution, exercises the rights and performs the obligations as an investor on behalf of the State. Central Huijin essentially plays a role as a state investment agency.[1] In fact, Central Huijin, as the largest shareholder, at least controls five large commercial banks, two securities companies, one financial holding company, one investment company and one reinsurance company. It also holds shares in many other State-owned financial enterprises, such as China Development Bank. These financial enterprises have been financing companies to “Go Global.”

Throughout the second half of 2009, Central Huijin completed two major investment in two insurance companies, China Export and Credit Insurance Corporation and New China Life. Consequentially, Central Huijin now has the potential to form an entity that has licenses to sell any type of insurance.[2] At the same time, Central Huijin may be affected by a relatively new national policy that requires all corporations with state-owned shared, which initially issue stocks publically, transfer 10 percent of its initial issuing stocks to the National Council for Social Security Fund[3]. Continuing its strategy, Central Huijin started a new round of capital injection into China’s largest commercial banks. These activities are presented in the following:

I. Aggressive Expansion into China’s Insurance Industry

A. Sinosure

China’s State Council has approved plans to reform both the shareholding and management structure of China Export and Credit Insurance Corporation (Sinosure), China’s sole policy-oriented insurer.[4] Under the plan, Central Huijin shall inject 4 billion US dollars into Sinosure by the end of 2009.[5]

“Sinosure will remain a wholly-state owned insurance agency and investment in the company will be restricted to funds from state agencies. However, the commercial insurance activities of the insurer will be split off from its core task of providing export and import insurance to international trading companies at preferential rates.”[6]

It was also reported that, in order to raise funds for the investment, Central Huijin plans to issue bonds worth 80 billion yuan (11.7 billion US dollars) in the interbank market. A portion of the funds raised will also be used to help Huijin complete its injection of 12 billion US dollars into the China Export-Import Ban (Exim).[7]

China Exim Bank and Sinosure were established to assist Chinese exporters in exploring overseas market. The Ministry of Finance is currently the sole owner of the two institutions.

Exim would be following in the footsteps of policy lender China Development Bank (“CDB”), which at the end of 2007 got a capital injection of $20 billion from Central Huijin as part of its restructuring.[8] Central Huijin has converted CDB from a policy lender to a commercial bank who has been playing a significant role in assisting Chinese companies acquiring assets overseas.

B. New China Life

In another deal, Central Huijin has bought a 38.8 percent stake in New China Life Insurance Co Ltd. from Insurance Protection Fund.[9] This transaction renders Central Huijin the biggest shareholder of China's fourth largest life insurer. This was Central Huijin’s second major shareholding in a Chinese insurer, after buying into Sinosure.[10]

The background of this deal, as well as the history of New China Life, is worth attention. In September 2006, China Insurance Regulatory Commission began to investigate in the capital flows of New China Life, because the former chair of the board, Liang Guan, who had been managing the company for over eight years, was dismissed as he diverted the company’s funds. Guan, along with his partner, was accused of both job occupation and diversion of funds.[11]

Major Chinese insurance companies were interested in acquiring shares of New China Life during the year of 2007 and 2008, when New China Life was in financial trouble as a result of the embezzlement described above.[12] A Swiss insurance company holds 20 percent of New China Life’s shares, which already touches the limit of the amount that an overseas shareholder can hold. As a result, indicated by an insider of New China Life, Central Huijin became the most acceptable buyer, thus new shareholder.[13]

The Caijing magazine said the move would enhance Huijin's role as a government vehicle to control equity stakes in key financial institutions, and that the upcoming recapitalization would help China's export sector, which was hit hard by the global slowdown.[14]

II. State-Owned Shares Transfer Policy

Perhaps one of the most remarkable policies provided during the second half of 2009 is the State-Owned Shares Transfer Policy. China’s State Council issued the policy in June. Under the policy, all corporations with state-owned shared, which initially issue stocks publically, shall transfer 10 percent of its initial issuing stocks to the National Council for Social Security Fund[15]. The Fund, as original shareholders be prohibited from selling these shares.[16]

This national policy appears consistent with the idea of building harmonious society, a cornerstone of emerging Chinese constitutionalist policy. Seen together with Central Huijin’s recent investment in China’s insurance industry, this policy also reflects the government’s consciousness of a fact that China is turning into a graying society. Meanwhile, it is still not clear regarding whether this policy can work nicely with China’s corporate law. It is also not clear to what extent the policy will affect other non-state shareholders’ interest, thus China’s economy. For example, this policy will have the National Council for Social Security Fund directly take over some asset originally belonging to some local State-owned Assets Supervision and Administration Commission. In this circumstance, would the policy tighten the tension and conflict between the central and local governments? For another, if a corporation is already insolvent, would creditors simply forgo the transferred shares?

Central Huijin, as the agency for state investment activities, holding controlling shares of many state owned enterprises, apparently was affected by this policy.

III. A New Round of Capital Injection into Largest Commercial Banks

It was reported in September 2009 that Central Huijin had completed a rescue scheme to increase shareholdings in China’s largest banks.[17] Huijin bought 30.07 million yuan-denominated shares of Industrial & Commercial Bank of China Ltd (ICBC), taking its ownership to 35.42 percent from 35.41 percent, ICBC said in a statement. Huijin also purchased 5.13 million shares of Bank of China (BOC) and 16.1 million shares of China Construction Bank (CCB), boosting its stakes in the two banks to 67.528 percent and 57.09 percent respectively. Huijin completed the purchase on Sept 28.[18]

In October, Central Huijin announced that it would start a new round of capital injection into these large commercial banks. Central Huijin also announced that it would increase its holdings in the three largest banks in the next twelve months.[19]


[1] China Investment Agencies Get New Roles (2009), http://english.caijing.com.cn/2009-02-12/110055513.html.

[2] http://www.caijing.com.cn/2009-11-18/110314850.html.

[3] The National Council for Social Security Fund, http://www.ssf.gov.cn/###.

[4] http://www.thefreelibrary.com/China+:+Central+Huijin+to+Fund+Restructuring+of+State-owned+Export...-a0212664655.

[5] http://www.thefreelibrary.com/China+:+Central+Huijin+to+Fund+Restructuring+of+State-owned+Export...-a0212664655.

[6] http://www.thefreelibrary.com/China+:+Central+Huijin+to+Fund+Restructuring+of+State-owned+Export...-a0212664655.

[7] http://www.thefreelibrary.com/China+:+Central+Huijin+to+Fund+Restructuring+of+State-owned+Export...-a0212664655.

[8] Central Huijin currently holds 49 percent of CDB. The company is 51 percent controlled by the Finance Ministry. http://www.chinadaily.com.cn/cndy/2009-09/17/content_8701156.htm.

[9] http://www.chinadaily.com.cn/bizchina/2009-11/20/content_9008702.htm. “We agreed to hand over the 38.815 percent of NCL to Central Huijin in a lump sum during a recent board meeting,” according to a statement by the fund, which protects policyholders if an insurer faces acute financial crisis. The statement, however, did not include details of the value of the deal. Id.

[10] It holds an 85.5 percent stake in China Reinsurance (Group) Corp, the country's only State-owned re-insurer. http://www.chinadaily.com.cn/bizchina/2009-11/20/content_9008702.htm.

[11] http://www.caijing.com.cn/2009-03-30/110129725.html.

[12] http://www.caijing.com.cn/2009-03-30/110129725.html.

[13] http://www.caijing.com.cn/2009-03-30/110129725.html.

[14] “据海关总署近日发布的统计信息,1月至8月中国对外贸易累计进出口总值13386.6亿美元,比去年同期(下同)下降22.4%。其中出口7307.4亿美元,下降22.2%;进口6079.2亿美元,下降22.7%。累计贸易顺差1228.2亿美元,减少19%.” http://www.caijing.com.cn/templates/inc/webcontent.jsp?id=110250869&time=2009-09-15&cl=100&page=all.

[15] The National Council for Social Security Fund, http://www.ssf.gov.cn/###.

[16] http://www.gov.cn/jrzg/2009-06/19/content_1345139.htm. 《境内证券市场转持部分国有股充实全国社会保障基金实施办法》, http://ifb.cass.cn/show_news.asp?id=24155#.

[17] http://www.chinadaily.com.cn/cndy/2009-09/29/content_8748298.htm.

[18] Huijin's move aims to buoy investor trust, http://www.chinadaily.com.cn/cndy/2009-10/13/content_8784053.htm .

[19]汇金增持行动“并无深意”但面临挑战, http://www.caijing.com.cn/templates/inc/webcontent.jsp?id=110280045&time=2009-10-12&cl=100&page=all.

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