Temasek: The Model for China's Sovereign Wealth Fund?

China Investment Corp.'s structure is similar to Singapore's Temasek, but CIC lags in accountability and transparency, says research firm Monitor

After months of rumors, news of a Chinese sovereign wealth fund was finally confirmed in March 2007. Making his address to the National People's Congress, Finance Minister Jin Renqing said an agency would be formed to invest part of China's growing stockpile of foreign currency reserves.

The announcement also confirmed another rumor making its rounds: That China would base its new agency on one run by the Singapore government.

"We will draw upon the successful practices of other countries, for example Singapore's Temasek, to manage China's foreign exchange reserves," Jin said.

The fund was eventually named China Investment Corp (CIC), and it was launched last September, with US$200 billion in starting capital. It also catalyzed an ongoing global debate about sovereign wealth funds' relationships with their governments. The juxtaposition of Chinese and Singaporean agencies sheds some light on the picture.

According to an exhaustive new report on sovereign wealth funds by research and consulting firm Monitor, these agencies were created in two major waves.

In the 1970s, emerging Asian economies began putting their fiscal surpluses into agencies that, in terms of risk, were more active than central banks but more conservative than state-owned enterprises. This model was first used by the Kuwait Investment Authority in 1953. Singapore's Temasek Holdings and Government Investment Corp (GIC) and Norway's Government Petroleum Insurance Fund were created in this phase.

The next wave began in 2000, giving China and Russia their first sovereign funds. Significantly, these new entities make up half of the world's 36 sovereign wealth funds, according to Monitor. Sovereign wealth funds now collectively account for US$1.9-2.9 trillion under management, the study estimates.

"The combination of sovereign ownership, large size and impressive growth prospects, appetite for risk, and lack of transparency constitutes a perfect storm for political controversy," the report said.

It's important to note the term "sovereign wealth fund" has no globally agreed-upon definition. Agencies may be funded by proceeds from natural resources, fiscal surpluses or foreign exchange reserves. They range in size from US$2 billion (Azerbaijan) to US$875 billion (Abu Dhabi Investment Authority).

Bailing out i-banks

The ongoing credit crisis has attracted sovereign wealth funds to weakening financial institutions in droves, and the Chinese and Singaporean players are no different. GIC spent US$16 billion on stakes in UBS and Citigroup. Temasek bought a 9.5% holding in Merrill Lynch for US$4.4 billion. China's fund made its debut investment of US$3 billion in private equity firm Blackstone last year. That stake has lost about 40% in paper value.

Since then, CIC has spent US$5 billion on a 9.9% stake in Morgan Stanley and invested US$3.2 billion in a JC Flowers private equity fund.

"You can argue that the CIC's stakes in various other companies—Blackstone, Morgan Stanley and the like—are also similar to Temasek's approach of taking large stakes in companies and not just acting as a passive portfolio manager," said Brad Setser, a fellow for geoeconomics at the Council on Foreign Relations in New York who studies sovereign funds.

The structures of the Chinese and Singaporean funds also share some similarities. When CIC was set up, it also absorbed an investment agency called Central Huijin, which held stakes in China's state-owned banks, and was owned by the central bank. Temasek was created to hold and manage assets formerly owned by Singapore's finance ministry.

"The shift of Huijin's stakes in the state banks to the CIC is very Temasek-like," Setser said.

But that's where the similarities end. The chief difference between a Singaporean fund and CIC is the degree of transparency the entity has chosen to apply.

Gauging transparency

The Peterson Institute for International Economics has devised a "scoreboard" that ranks the world's funds on four dimensions, with "transparency and accountability" responsible for nearly half the possible total points.