Source: CCTV.com

06-08-2008 17:36

1.68 trillion US dollars. That's the amount of foreign exchange reserve China had held by the end of March. In just the past two years, China has doubled its forex reserves, and overtaken Japan to become the world's largest forex holder.

In just the past two years, China has doubled its forex reserves, and overtaken Japan to become the world's largest forex holder.

Being flushed with cash comes with it a huge amount of responsibility. The key question was how to best maximize this huge sum of money, and generate greater returns. Thus came the establishment of the country's sovereign fund - the China Investment Corporation, or CIC. Officially inaugurated in September of 2007, it was created to provide one solution.

Wang Shuilin, Managing Director of Public Relations & Int'l Cooperation Department of CIC said "We'd like to proactively invest it in the world capital market. To assure the stability of the world market, but also the sustainability of the Chinese economy. We'd like to enhance the rate of return for the benefit of the Chinese people."

Sovereign wealth funds, many of which are based in Asia and the Middle East, manage an estimated two to three trillion US dollars, greater than the world's entire hedge fund combined. When a country runs a current account surplus and accumulates more reserves than it feels it needs for immediate purposes, it can create a sovereign fund to manage those "extra" resources.

As a newly established sovereign wealth fund, CIC manages 200 billion US dollars. It's no wonder this "super baby" has caught so much attention from around the world even before it was officially "born".

Andrew Brown, Partner of Beijing Brunswick Consultancy Ltd. said "The question people are asking is to what use China will put its forex reserve. Is it going to be supportive to our business? Is it going to be supportive to our economies, or is China going to use its forex reserve in order to promote its own particular national interest. So, China needs to address those concerns."

CIC is funded through the purchase of the country's foreign reserves, and it is a sovereign wealth fund. How to ease these fears and doubts from overseas? CIC's answer is simple and straight.

Wang Shuilin said "Watch how we invest in the coming 6 months,9 months, 3 years, 6 years and you will have the answer. We care about the stability of the world market, because Chinese economy is fully integrated into the world economy. If the Chinese economy does well, the world economy will benefit. And also if the global economy does well, China will benefit too. So our interest is in the long term, sustainable and stable world market."

This is just a glimpse of the challenges ahead. CIC faces much more than these questions. What and where to invest? What kind of fund manager to recruit? And how to balance the risk and returns?