The capital in hand for the CIC will be more than the current $200 billion because China's forex reserves are increasing. By the end of July 2007, China had $1.4 trillion in forex reserves, which is expected to exceed $2 trillion by 2010.

How will the CIC allocate its investments and what are the influences each of its moves will bring to the global financial market? These questions are of great concern to many in global financial institutions.

"The Chinese Government decided to found a special institution to manage its excessive forex reserves more actively, shoulder more risks, realize more diversified asset portfolio and reap higher returns on investments, which is very important and beneficial to China," said Fred Zuliu Hu, Managing Director of Goldman Sachs (Asia) in an interview with Xinhua News Agency, who considers the CIC a new model for managing China's gigantic forex reserves.

The CIC with huge capital at its disposal also gives rise to worries. It was reported by China Business that the German authorities have paid special attention to CIC's investment in Blackstone. German Chancellor Angela Merkel said on July 18 that Europe should adopt the same method to check the merger and acquisition activities conducted by foreign state-holding investors and called it "her priority" in the second half of her tenure.

Jin Renqing, former Minister of Finance, said in March that the CIC is modeled after the Temasek Holdings Pte Ltd., the investment arm of the Singaporean Government. This indicates that the Chinese Government hopes to augment external direct investments, especially equity investments in foreign companies.

Established in 1974, Temasek Holdings is solely owned by the Singaporean Ministry of Finance. The state-owned investment agency has contributed to a large portion of the country's forex reserves.

Capable of profiting?

The CIC is facing high cost pressure upon its inauguration. The registered capital of $200 million was from the sales of special treasury bonds. The interest rates for the 10-year and 15-year special treasury bonds are around 4.3 percent and 4.5 percent, respectively. Besides this, the CIC will suffer from foreign currency exchange loss of around 5 percent every year when taking into consideration the yuan's appreciation. Adding in the operation and management costs, the CIC will have a combined cost ratio of nearly 10 percent. In other words, the CIC will run at a loss if the annual average return on investment is lower than 10 percent.

With the high threshold for profiting ahead, whether the new investment corporation will retain and even increase the value of the world's largest forex reserves worries too many people. The government and the people expect it to profit despite global financial market stumbles led by the weakening U.S. economy.

Besides, overseas politicians feel uneasy, fearing that the Chinese Government will seize overseas assets through the CIC, which is among many problems the company has to solve.

Hu hence believes the CIC should first establish a corporate governance structure within the company before working on any investment project. "The Blackstone project is an exception which is a signal of the CIC's debut," said Hu. "The most pressing task for the company at present is to build an internal mechanism consisting of investment principles, a competent team as well as the IT system solutions."

He Sheng, a researcher with Changjiang Securities, believes the greatest contribution of the CIC at this stage is not the money it will make, but that it will help curb excessive liquidity and reduce the impact that excessive liquidity has on interest rates in bond markets. Furthermore, the imbalance in international payments will be eased if the CIC imports directly from or invests in overseas markets, said He.

Establishment of the CIC 2006: The government designated a special team to research on how to strengthen forex reserve management and expand investment channels of the huge reserves in the first half of the year. January 19-20, 2007: The third national financial work conference proposed the overall requirements and major targets for the government financial work: "We must adhere to the principle of abidance to laws and regulations, paid use of state-owned resources, efficiency improvement and effective supervision, actively seek out and expand channels and models for forex reserve investments, and found a forex investment agency, persisting in separating government functions from company management and independent operation." March 2007: The State Council formed a working team on forex reserve investment which involved 14 ministries discussing how to fulfill the requirements and targets put forward by the national financial work conference. The working team proposed that the Ministry of Finance launch the CIC with the capital from issuing special treasury bonds to buy forex reserves from the central bank and that the CIC conduct equity investments in major domestic state-owned financial institutions, direct investments in overseas financial market, expand investment channels to increase long-term proceeds and retain and increase the value of state-owned assets. According to these ideas, the working team also made a plan for establishing the CIC. May 22, 2007: The new company, still in preparation, made its first investment in non-voting shares, valued at $3 billion, in the U.S. private equity firm The Blackstone Group. August 2007: The State Council gave its nod to the plan for forming the CIC, and the preparations started. September 29, 2007: China Investment Corp. was launched officially.