Sovereign wealth fund must look long-term

There are good reasons for the size of China's foreign reserves, which since 2000 have ballooned into the world's largest. Although China is the world's largest importer of soybeans and iron ore, the country's industrial processing, carried out mostly for large foreign multinationals by the huge, hard-working and skilful Chinese labor force, still dominates its foreign trade. This fact makes China's trade surplus quite insensitive to rises in the value of the yuan because of the large import content (of raw materials and components) in China's exports.

Per head of population, China's foreign reserves are smaller than those of several other major surplus countries, such as Japan, the Middle Eastern oil exporters, Norway and Singapore, but China's capital needs for modernization over the next 50 years are much larger. Although much of these needs will be borrowed on the international markets, or invested by foreign companies, China needs to preserve its capital strength to underpin its long-term development. Its large foreign reserves bring China credibility in the world's financial markets. Their successful management is of critical importance to China.

China Investment Corp, China's sovereign wealth fund, of which the headquarters are in Beijing, was set up six years ago with the aim of investing part of China's foreign reserves abroad as well as holding the country's equity interests in its most important financial institutions, including the four major Chinese commercial banks and China Development Bank. CIC was initially funded with $200 billion, by way of a complicated accounting transaction involving several Chinese central government agencies including the Ministry of Finance, the Peoples' Bank of China, and Agricultural Bank of China. In 2010, the creation of CIC International with responsibility for investing CIC's overseas portfolio simplified and strengthened the corporation's structure. By the end of last year it held a total of $569 billion in assets, of which about $190 billion was managed in a global asset portfolio by CIC International.