Inside China's CIC

It is the eve of the opening ceremony of the Summer Olympic Games, and Beijing is preparing to welcome the world. Olympic banners and posters line the main avenues of the capital, and thousands of volunteers, brightly clad in blue, white and yellow shirts, fan out to the airport, hotels and subway stations to assist visitors. At the iconic National Stadium, dubbed the Bird’s Nest because of its soaring latticework of steel supports, officials go through final preparations for the opening extravaganza directed by moviemaker Zhang Yimou, which will dazzle hundreds of millions of television viewers around the globe. U.S. President George W. Bush and a host of other world leaders are arriving to take part in the festivities — and to acknowledge China’s reemergence as a major economic and political power. After 30 years of breakneck development, China is ready and eager to claim its place on the world stage.

Such powerful ambition is also evident at the spanking new offices of China Investment Corp., the country’s fledgling $200 billion sovereign wealth fund. Barely a year old, CIC has already made its name and heft felt throughout the world, taking high-profile ownership stakes in premier U.S. banking institutions and, like Chinese emperors of old, receiving a seemingly endless line of suppliants. In June 2007, even before its formal establishment, the fund bought 9.9 percent of private equity giant Blackstone Group for a cool $3 billion and then in December helped recapitalize Morgan Stanley with a $5.6 billion injection. More than 100 A-list global fund managers, including such illustrious firms as U.S.-based Franklin Templeton Investments and Pacific Investment Management Co. and U.K.-based Aberdeen Asset Management and Ashmore Investment Management, are vying for a slice of the $30 billion or more in investment mandates that CIC will award later this year, and a Who’s Who of financial dignitaries regularly pass through the fund’s central Beijing offices, a short 15-minute drive from Tiananmen Square and the Forbidden City. On the day before the official opening of the Olympics, an array of international financiers drops in for meetings. Among them: David Rubenstein, co-founder and managing director of private equity firm Carlyle Group, and Caio Koch-Weser, vice chairman of Deutsche Bank and former German deputy Finance minister.

In the midst of a wrenching credit crisis that has humbled many, if not most, of the biggest banks, sovereign wealth funds, though often shrouded in secrecy and controversy, have emerged as the last best hope for saving a financial system on the brink. Some, like Norway’s Government Pension Fund - Global and the Abu Dhabi Investment Authority, are bigger, and others, like the Kuwait Investment Authority, established in 1953, are older, but arguably no fund packs the clout of CIC, the investment arm of a resurgent China.

For Lou Jiwei, the fund’s powerful chairman and chief executive officer, the aim is clear: Make CIC one of the world’s biggest and best-performing fund managers, an investing juggernaut with a stature commensurate with China’s growing economic power.

“We hope to be a large institutional investor in Asia, a leader in Asia,” he tells Institutional Investor in an exclusive interview, the first he has given to any media outlet — foreign or Chinese — since taking charge of the sovereign fund in September 2007 (see page 76).

A shrewd veteran of China’s great reform movement, Lou, 58, is a realist who knows that achieving that goal will be a challenge. “Yes, we may be No. 1, or near No. 1, in terms of assets under management, and we may grow even larger,” he acknowledges. “But will we be No. 1 in terms of sophistication and ability? That won’t be easy.”

To be sure, CIC’s success is far from guaranteed. Almost overnight the fund was handed a mountain of cash by China’s government, and Lou and his team have struggled to build up the expertise and systems needed to manage the money. The big investments in Blackstone and Morgan Stanley have been flops, at least on paper, sparking no small amount of criticism at home, particularly in online forums. “China Investment Corp. wants to be an investment hero, but it’s come up short of breath with Blackstone. It’s lost $1.3 billion so far,” one unidentified blogger wrote earlier this year in a posting on the Chinese Web site Sohu.com. And unlike such big sovereign wealth funds as those of Norway and Abu Dhabi, which can count on a committed inflow of money from oil earnings, CIC has no dedicated source of funds but instead must depend on allocations of foreign exchange reserves by the ruling State Council. Lou clearly expects CIC to be China’s preeminent global investor, but he knows that he and his team will have to earn that right.

“They’re trying to do something no one else has done, which is to jump-start a sovereign wealth fund with $200 billion,” says one senior financier, who spoke on condition of anonymity. “The people who have that kind of money have been doing this for ten, 20, 30 years.”

Still, if CIC faces a steep learning curve, few observers doubt it will earn pride of place among the biggest investment funds in the world. Crucially, CIC enjoys firm political leadership from Lou, a key architect of China’s market-oriented economic reforms in the 1990s who served as deputy Finance minister earlier in this decade. Lou has assembled a top-notch management team headed by chief investment officer Gao Xiqing, who led the development of the country’s stock markets in the ’90s as vice chairman of the China Securities Regulatory Commission and in recent years set up the first modern portfolio management system at the 516 billion yuan ($75 billion) National Council for Social Security Fund. Most important, China has an immense store of wealth that it needs to put to work. The country has $1.8 trillion worth of reserves, by far the most of any nation, and thanks to its status as the world’s largest exporter, that cash hoard is growing by some $400 billion a year. China has traditionally invested its reserves mainly in U.S. Treasuries and agency securities, but with the yuan appreciating markedly against the dollar, authorities are eager to diversify the country’s investments and boost returns. “Our mission is to maximize long-term risk-adjusted returns for our shareholders,” says Lou.

China’s financial muscle, like that of other big sovereign wealth funds, arouses fear in some quarters in the U.S. and Europe. Several members of Congress expressed concerns about CIC’s purchases at a hearing earlier this year of the U.S.-China Economic and Security Review Commission. “While foreign governments may invest money in our country to make a profit, they may also do so in order to further their foreign policy ambitions, to acquire national security assets or to purchase a stake in strategic industries,” said Virginia Senator Jim Webb, a Democrat.

During his interview with II, Lou takes pains to portray CIC as a “stakeholder” in the global financial system. The fund, he says, aims to be a mostly passive investor that pursues commercial objectives and usually doesn’t seek board representation, although the board doesn’t rule that out. “Roughly 60 percent to 70 percent of China’s gross domestic product is tied to the world economy. You can see how open China’s economy is to global trade,” he says. “We want to see long-term stability in global financial markets because long-term stability is to our benefit. The U.S. markets are going through turbulent times. We hope to see the U.S. recover after the subprime crisis.”

CIC has been playing an active role in talks being led by the International Monetary Fund that aim to draw up generally agreed principles and practices for sovereign wealth funds. Wang Shuilin, a former senior economist at the World Bank who Lou recruited to serve as CIC’s head of communications and international relations, represents the fund in the IMF talks and is preparing the launch of a Web site this fall that will disclose more information about CIC’s operations and strategy. The fund plans to issue an annual report at some point and “will gradually increase its transparency to the extent of not compromising its commercial interests,” Lou tells II.

The chairman has critics to contend with on the home front as well. Blackstone shares have fallen by nearly 45 percent from the company’s June 2007 initial public offering price, to $17.13 late last month, giving CIC a paper loss of more than $1.3 billion on its investment. The deal was arguably a symbol of CIC’s inexperience. Blackstone senior managing director Antony Leung, a former Hong Kong financial secretary, approached CIC executives about the investment before the fund was formally established.

“It has been a black eye for China Investment. It’s a sign of incompetence,” says Guan Anping, a Beijing-based securities lawyer with Anjing & Partners and a onetime aide to former vice premier Wu Yi, who was China’s top trade official before retiring in March.

Observers say the poor performance of the Blackstone stake has served to intensify the rivalry between CIC and the State Administration of Foreign Exchange, an arm of the People’s Bank of China that previously enjoyed a monopoly on managing China’s reserves. SAFE raised eyebrows earlier this year when it bought a 1.8 percent stake in British oil company BP for a reported £1 billion ($1.82 billion). CIC was supposedly created to make that kind of investment, and it represented a significant departure from SAFE’s traditional fixed-income profile.

CIC executives are sensitive to criticism of the performance of the fund’s early investments. “Our ultimate investors are the Chinese public,” Wang explains. “We can’t mess around and make bad investment decisions. We have a huge responsibility, a huge burden on our shoulders.” Still, Wang says, CIC is committed to keeping its Blackstone shares as a long-term investment. “I met Dr. Henry Kissinger recently in the U.S., and he asked if China Investment would sell,” says Wang. “I said, ‘No, we have confidence in Blackstone. The fundamentals are strong. We haven’t lost money because we haven’t sold.’”

Chairman Lou echoes the point. “Yes, the valuations of Blackstone and Morgan Stanley have fallen after we bought our stakes,” he says. “But we believe both are strong financial services companies and have bright futures. Over the longer term we remain confident with both companies.”

China Investment was founded in September 2007 with a mission of helping the nation diversify its foreign exchange reserves and to generate earnings for the country’s rapidly aging population. Premier Wen Jiabao appointed Lou, a leading advocate of establishing a sovereign wealth fund, to bring together a team of experts from inside and outside the government to oversee the new entity, which was modeled after the Government of Singapore Investment Corp., a 27-year-old entity that manages an estimated $300 billion-plus worth of assets.

Lou is known as a man who is unafraid to stand up for his beliefs, says Laurence Brahm, an American lawyer and an adviser to the Chinese government. As a director of the cabinet’s State Commission for Restructuring the Economy in the early 1990s, Lou worked closely with former premier Zhu Rongji to implement landmark fiscal and financial reforms that paved the way for the country’s surge in growth over the past decade. “Criticism never stopped Lou Jiwei from doing his job well,” says Brahm. “He is the best man for the job [at CIC] and has surrounded himself with people like him — people like Gao Xiqing, pioneers of China’s economic reforms.”

Lou, who is often referred to as “minister” at CIC, also enjoys plenty of clout within the ruling Communist Party. He is an alternate member of the 300-member Central Committee, which elects China’s top leaders, and is well placed to seek a direct audience with Premier Wen or President Hu Jintao, Brahm says. Lou’s modern office is spacious but workmanlike, not unlike that of a senior investment banker. A double Bloomberg screen dominates his desk. For ornamentation there is a scattering of Chinese antiques, a tank of dazzling red goldfish and a silk wall hanging bearing calligraphy of the poem “Yueyang Louji,” by Sung dynasty poet Fan Zhongyan. The poem, a commentary on the need for leaders to rule wisely to maintain their legitimacy, contains a phrase famous in China, “Feel worried before the world begins to worry, and rejoice after the world begins to rejoice.”

CIC’s offices underscore the fund’s close connections to the centers of power. The fund occupies the 16th through 19th floors of the New Poly Plaza, an imposing glass-and-steel high-rise that is owned by China Poly Group Corp., an offshoot of the People’s Liberation Army that has interests ranging from real estate to weapons and is led by chairman He Ping, a PLA general and son-in-law of the country’s former paramount leader, Deng Xiaoping.

Lou has assembled a cadre of top managers that includes Gao, who pioneered the Social Security Fund’s move into overseas investments two years ago, and Wang Jianxi (Jesse), a former executive vice president of Bank of China International Holdings and assistant chairman of the Chinese securities commission who is now executive vice president and chief risk officer at CIC. Together the exe­cutives have grown CIC’s staff to more than 230, recruiting everyone from former state officials to investment bankers; Lou and his team have also taken in veteran bankers seconded from firms including JPMorgan Chase & Co., Goldman, Sachs & Co., Blackstone and Morgan Stanley. The fund is considering opening offices in New York and London to help oversee investments and represent CIC in the U.S. and Europe, spokesman Wang says. Notwithstanding CIC’s rapid growth, bankers who have worked with the fund say it still needs talent, particularly in private equity.

“They need help in everything,” says one banker who spoke on condition of anonymity. “They’re really shorthanded.”

Wang Jianxi acknowledges that the fund hasn’t been able to hire fast enough to fulfill its mission. “We’ve been recruiting, and we’re still recruiting,” he says.

CIC’s $200 billion in assets gives a somewhat misleading impression of the fund’s actual buying power, at least at the moment. More than three quarters of its money has already been allocated. At CIC’s founding last year, the State Council directed it to pay $67 billion to acquire Central Huijin Investment Corp., the government holding company that owns large stakes in all major state-run banks, including Industrial and Commercial Bank of China and the Bank of China. The fund also spent $20 billion to recapitalize China Development Bank, a policy lender that is preparing to adopt a commercial strategy, and it is committed to spending as much as $45 billion to recapitalize the Agricultural Bank of China. Deduct the $8.6 billion that CIC paid for its stakes in Blackstone and Morgan Stanley, as well as a $3.2 billion investment in a new private equity fund it is establish­ing with JC Flowers & Co. that will focus on investing in U.S. financial assets, and CIC has only about $56 billion in free cash to invest, according to estimates by Z-Ben Advisors, a Shanghai-based fund management consultant.

Still, the fund’s growth potential is tantalizing. Z-Ben principal and founder Peter Alexander predicts that the government will hand Lou and his team another $200 billion in 2009 and the same amount in 2010. That’s certainly possible given the increase in China’s reserves. But Lou is taking nothing for granted. “How much we may get in the future isn’t something we at China Investment can determine. It also depends on our performance, on whether we do a good job or not.”

In a bid to improve returns, the sovereign wealth fund is in the final stages of awarding 12 or 13 equity mandates to outside fund managers and another eight to ten fixed-income mandates, says risk officer Wang. The process is similar to one that Gao introduced, on a smaller scale, at the Social Security Fund two years ago. The equity mandates will cover four areas: global equities; emerging markets; Europe, Australasia and Far East; and non-Japan Asia. According to Jing Ulrich, chairman of China equities at JPMorgan, the global mandate sets a target of beating the MCSI all-country index by 300 basis points net of fees, the EAFE mandate aims to exceed the MSCI EAFE active index by 200 basis points, and the emerging-markets mandate targets a return of 300 basis points above the MSCI emerging markets index. In fixed income, CIC will award four to five mandates in each of two categories: global bonds and emerging-markets bonds.

“We position ourselves similarly to large public pension funds or endowment funds,” says Wang. “How much we hand out in terms of mandates depends on market conditions.” Wang admits that he and his colleagues are “behind in our investment budgets.” Market expectations that CIC will assign $35 billion of mandates by year’s end may be on the “high side,” he adds.

Consulting firms such as Mercer and Watson Wyatt Worldwide are believed to be advising CIC on the selection of fund managers. Execu­tives at those companies declined to comment on the process.

Most banks share a similar reluctance to talk about their dealings with CIC, a stance that reflects both the sensitivity of sovereign wealth funds generally and a determination not to jeopardize a potentially lucrative long-term relationship with the Chinese fund. Officials at Morgan Stanley, Blackstone and JC Flowers — which have struck the biggest deals to date with CIC — all declined to comment on the fund.

Notably missing from CIC’s initial round of equity mandates are any portfolios geared toward U.S. stocks. SAFE has invested the bulk of China’s reserves in dollar assets such as U.S. Treasuries, and fund managers and economists have been looking closely for any sign that China might diversify its holdings into nondollar assets. But Lou insists that currency factors are not driving the fund’s strategy. “We look at projects one at a time and analyze their risks individually,” he says. “We don’t rush into any investment just because it is a nondollar asset.”

Z-Ben’s Alexander predicts that CIC will seek bids for mandates on the U.S. and other developed markets in 2009.

CIC is requiring portfolio managers to submit all presentations and bids for mandates in Chinese and is very demanding in requesting information about bidders’ investment processes, says a senior executive at a major U.S. investment bank that is advising the sovereign fund and is also seeking asset management mandates. “China Investment is a very interesting and learning organization,” this banker says. “Each time you talk to them, they’re getting more sophisticated.”

They had better do so. CIC is not only playing catch-up with most other sovereign wealth funds, but also operating under something of a handicap. Rather than being handed a chunk of foreign exchange reserves outright, the State Council directed the Finance Ministry to seed the fund with the proceeds of a 1.55 trillion-yuan (then worth $200 billion) bond issue. The aim of that exercise was to drain some of the massive liquidity out of the Chinese economy in a bid to contain inflation. But the tactic simply puts additional pressure on Lou and his team: CIC must earn a minimum of 300 million yuan ($44 million) a day to pay the interest on the bonds, estimates JPMorgan’s Ulrich.

Lou emphasizes CIC’s unique funding structure in seeking to reassure overseas critics who worry that the fund has ulterior motives that are politically driven. “We need to pay 4.5 percent interest on those bonds,” he says. “So I need to make money. If I don’t, I cannot survive. So how can I have political motives?”

The prospect of further appreciation of the yuan adds to the challenge that CIC faces. The Chinese currency has risen by more than 18 percent against the greenback since the government abandoned the dollar peg in 2005 and tied the yuan to a basket of currencies. The yuan has weakened slightly since mid-July, when government officials expressed concern that its strength would hurt exports, but many economists believe the Chinese currency will advance another 10 percent against the dollar in the coming year. Dollar weakness makes it harder for CIC to generate higher returns by venturing overseas even as it increases China’s need to diversify its reserve holdings.

“Given the near-certainty of yuan appreciation over the next two years, China can no longer leave its foreign exchange reserves in low-yielding instruments,” says Z-Ben Advisors’ Alexander.

China also has massive financial needs, notwithstanding its newfound wealth. A huge supply of low-cost labor has transformed China into the world’s workshop and helped the country generate a record trade surplus of $262 billion last year. But the labor force is aging rapidly as a consequence of the country’s one-child family-planning policy for curbing population growth.

Ha Jiming, chief economist for Beijing-based China International Capital Corp., projects that the working-age population will peak at about 1 billion of China’s 1.3 billion people in 2015. The number of people over the age of 65 will grow from 127 million in 2015 to 325 million by 2050, he estimates. “Most of these people were low-cost laborers, which allowed China to become the low-cost factory,” Ha says. “However, as these people get old, China’s demographic dividend will start to become its demographic burden.”

As CIC’s Wang puts it, “You may think we have huge foreign exchange reserves, but we also have a lot of elderly to care for in the future.”

In addition to generating big returns to satisfy domestic demands, CIC has the difficult task of appeasing politicians globally. Many countries worry that China will use its massive wealth to gobble up companies and assets around the world and to pursue political as well as commercial objectives. Those concerns were heightened late last year and early this year when several sovereign funds took significant stakes in hard-pressed U.S. financial institutions; CIC purchased a 9.9 percent interest in Morgan Stanley last December, shortly after the investment bank wrote down $9.4 billion in subprime-related investments. “We need to have a lot more control over what they do and how they do it,” former Democratic presidential candidate Hillary Clinton said of sovereign wealth funds when she was campaigning for the nomination in January.

CIC spokesman Wang is perplexed by all the fuss. “We are trying to be as transparent as possible,” he says. “We are brand new, but we already are in the process of building a state-of-the-art Web site to explain ourselves to the world, and we do plan to issue annual reports. But we also must state that we cannot say everything, as many things we do involve proprietary information.”

Chairman Lou says emphatically that there is no reason for foreigners to fear CIC. “China Investment usually doesn’t seek management rights and doesn’t even seek board representation in most of its investments,” he tells II. The fund focuses on making passive investments, both by awarding mandates to external portfolio managers as well as by taking direct minority stakes in companies, he says, adding, “I want to reiterate, we will go only where we are welcome.”

Sherry Liu, a vice chairman for JPMorgan in China, thinks outsiders are being excessively nervous about the impact of China’s sovereign wealth fund. “I believe the fears of foreign governments are illegitimate, but I understand where they’re coming from,” says Liu, who considers CIC’s Lou a friend. “Foreign governments must understand [that] Chinese companies are acquiring companies abroad for purely commercial reasons and are not being motivated by the government. The Chinese government gives it broad direction and support. With appropriate government approval, China Investment has the independence to make its own investment decisions.”

As if mollifying foreign critics wasn’t enough, CIC has plenty of domestic opposition to contend with. The fund may have a mandate from the State Council to pursue overseas investments, but other state-owned entities have international ambitions of their own. Prime among them is SAFE, the central bank arm that manages China’s foreign exchange reserves. Although SAFE has traditionally focused on fixed-income investments, the agency surprised many bankers and analysts earlier this year by buying stakes in foreign companies including BP, Australia and New Zealand Banking Corp. and Commonwealth Bank of Australia.

“There is intense rivalry between the State Administration of Foreign Exchange and China Investment,” says a banker from a large European bank who has met frequently with Lou and Gao. “SAFE feels that it can do everything that China Investment does.”

The poor performance of CIC’s investment in Blackstone has hurt the fund’s reputation among China’s bureaucracy, says Victor Shih, an assistant professor of political science at Chicago’s Northwestern University and author of Factions and Finance in China: Elite Conflict and Inflation. “China Investment’s first deal turned out to be such a flop,” Shih tells II. “It has given rivals within the bureaucracy an excuse to attack. In the future, China Investment may take a safer road of co-investing with big Chinese state-run companies.”

CIC’s Wang dismisses talk of competition between his fund and SAFE. “The State Administration of Foreign Exchange is tasked to manage our foreign exchange reserves, while China Investment Corp.’s job is to maximize profits for its shareholders and for the benefit of the Chinese people,” he says. “These are completely different roles.” Hong Weizhi, a spokesman for SAFE, declined to comment on CIC.

Regardless of the rivalry, CIC faces mounting pressure to juice up the performance of its portfolio. And the fund is starting at an inauspicious moment, with global equity markets in a funk and the yuan likely to continue to rise against the dollar and other major currencies. “I doubt China Investment will make much, if any, money in the near term, especially in such volatile global markets,” says securities lawyer Guan.

“China Investment must earn an average of 10 percent per annum in order to break even,” given the expected rise in the yuan, estimates Z-Ben’s Alexander. “Most people say they’re not going to achieve that. We say, ‘Yes, you’re right. But would you rather have your portfolio losing 8 percent or 2 percent?’ That’s the challenge CIC faces in helping to diversify China’s huge foreign exchange reserves.”

At CIC, Lou is well aware of the pressure for positive results. But as a Communist Party veteran and a student of Chinese history, he prefers to maintain a longer horizon. “We have to invest for the long term rather than be a short-term speculator. If you invest for the long term, there is a higher probability you will win.”

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Global Stakeholder An Interview with Lou Jiwei

Lou Jiwei helped transform China’s economy in the early 1990s by implementing fiscal and financial reforms as a trusted lieutenant of the country’s former premier and reform champion, Zhu Rongji. Today he hopes to play an equally pivotal role in the country’s development by managing its newfound wealth as chairman and CEO of China Investment Corp. On the eve of the opening ceremony of the Olympic Games, Lou discussed his ambitions for CIC and how sovereign wealth funds are helping to promote global financial stability in an exclusive interview with Institutional Investor Asia Bureau Chief Allen T. Cheng and International Editor Tom Buerkle. (For a full transcript, see our Web site, www.iimagazine.com.)

What does it mean for China to host the Olympic Games?

When I was with the Shanghai Municipal Restructuring Commission 20 years ago, I participated in an Institutional Investor event in New York that introduced China [to investors]. Now it’s clear what the economic situation is. We’ve made steady, substantial progress. The Olympics are an iconic symbolic that shows China’s economic growth. Just 20 years ago we would not have been able to hold an Olympic Games. We went to the Olympics for the first time in 1984, in Los Angeles. This Olympics demonstrates China’s success in economic reforms.

Why does China need a sovereign wealth fund?

CIC was created to meet China’s macroeconomic policy needs, which means to absorb excess liquidity in China and enhance the rate of returns for its mandated assets. China faces significant development and demographic challenges. Investing for the long term to generate a higher rate of return on our savings is a part of ensuring that China has the economic and financial wherewithal to meet those challenges.

We believe sovereign wealth funds can play a constructive role in maintaining financial market stability. There are many misunderstandings out there about sovereign wealth funds, especially at a time when markets are so volatile and major investment banks are selling shares. We understand these concerns, but we believe these fears are unfounded. We are new, so judge us by our actions.

What is CIC’s objective?

We’ve stated to the public our mission, and that is to maximize long-term, risk-adjusted returns for our shareholder. Of course, we hope to be a large institutional investor in Asia, a leader in Asia, but it will not be easy. Yes, we are No. 1 in China in terms of assets under management. We may grow even larger. But will we be No. 1 in terms of sophistication and ability? That won’t be easy. Similar sovereign wealth funds in Asia have decades of experience.

How will you measure success?

Success would be generating a good return. After all, business is business, and when you’re in business, act like you’re in business. We can help diversify our nation’s foreign exchange reserves and give some returns to the nation. We also hope to build a good team of fund managers, a team of professionals that is up to international standards. China’s globalization won’t stall. We will continue to open up to the world. We hope to produce more professionals for our financial markets as well as for the government.

How do you respond to the concerns that some foreigners have expressed about CIC’s clout and potential political influence?

I never thought there’d be so much criticism. We originally just wanted to be a low-profile investor. Now we have to really consider how the outside world views us. This is unavoidable. After all, China is a big country, a big economy, and other countries face insecurity in the face of such a big economy. Now we’re just being more prudent.

What is the message you want to give to the world about CIC?

People’s apprehensions are mainly about whether we operate for any political motives or not. If you look at the source of our capital, it comes from Treasury bonds issued by the minister of Finance. We need to pay 4.5 percent interest on those bonds. So I need to make money; if I don’t, I cannot survive. So how can I have political motives?

CIC vows to abide by local laws. We will be a good public citizen. We will focus on economic and financial interests. We will not be a tool for geopolitics. We support good governance. We support transparency. We want to reiterate that we are a stakeholder in the global markets. Roughly 60 percent to 70 percent of China’s GDP is tied to trade. We want to see long-term stability in global financial markets because long-term stability is to our benefit. The U.S. markets are going through turbulent times. We hope to see the U.S. recover soon from the subprime crisis.

Why did CIC invest in Blackstone and Morgan Stanley?

CIC was approached in both cases by the investee companies. Though their share prices are still under­water — affected by the credit crunch — we are quite confident in their fundamentals as well as in the U.S. financial market in the long run. As we repeatedly state, we are long-term investors. We needn’t be too bothered by their current share prices because our investments are in a lockup period for quite a long time and at least we receive dividends and interest regularly.

We also take note that [New York Democratic] Senator Charles Schumer said that CIC’s investment helped strengthen the liquidity and stability of Morgan Stanley, helped preserve jobs and helped preserve New York as a global financial center. We appreciate the senator’s statement.

What is your target for returns?

We seek higher returns over the long term, but we can’t give an exact number. The markets are volatile. We can’t plan as we did in the past. But our interest is in long-term stable and sustainable markets. If you ask Warren Buffett what his target is, I bet he would tell you he doesn’t have a specific target. That said, we do have short-term pressure. We have to pay our staff. The money is borrowed, and we have to pay dividends. But still, we have to invest for the long term rather than be a short-term speculator. If you invest for the long term, there is a higher probability you will win.

Is the dollar’s decline against the yuan pushing you to diversify quickly into nondollar assets?

We look at projects one at a time and analyze their risks individually. We don’t rush into any investment just because it’s nondollar assets.

Does CIC care about social responsibility?

I know other sovereign wealth funds have a different capital source, and the cost of their capital is lower than ours. We are not only profit-driven but will also fulfill our corporate social responsibility. We’ll be a good corporate citizen, and we’ll observe all laws and regulations in the countries where we invest. We will contribute to economic growth and prosperity. CIC attaches great importance to environmental protection and will invest in companies that care about the environment and climate change. We will not invest in industries that harm people, such as defense or tobacco. Although I smoke myself, CIC will not invest in the tobacco industry. We want to maintain a very good public image. But I want to reiterate, we will go only where we are welcome.

Can you give us an example that illustrates CIC’s intention to be primarily a passive investor?

When we bought a stake in Morgan Stanley, we said that John Mack manages the firm better than us. Why should we manage Morgan Stanley? CIC doesn’t seek management rights and doesn’t even seek board representation in most of its investments. All our investments up to now have been less than 10 percent of the investee’s equity. We focus as primarily a portfolio investor.

CIC needs to cultivate a very good public image. In our previous deals we voluntarily gave up voting power, and ownership in those entities was below 10 percent. Why? Because I know that 10 percent would trigger a certain investigation process. I don’t want to make trouble for anybody, including myself.