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DE RUEHBJ #1308/01 0990650
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O 080650Z APR 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6332
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 04 BEIJING 001308 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EAP/CM AND EEB/OMA 
TREASURY FOR OASIA/DOHNER 
USDOC FOR 4420 
STATE PLEASE PASS USTR FOR STRATFORD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PREL EINV CH
 
SUBJECT: China Investment Corporation Meeting with 
U.S.-China Economic and Security Review Commission 
 
REFS: 
 
¶1. (SBU) Summary: China Investment Corporation 
General Manager Gao Xiqing met with Commissioners 
of the U.S.-China Economic and Security Review 
Commission on March 31, 2008.  Gao suggested that 
U.S. officials be patient with CIC as it evolves 
relative to sovereign wealth fund (SWF) best 
practices.  Other SWFs have had many years to 
improve their operations.  Criticizing CIC 
management, who are all proponents of reform, too 
soon and too hard would be counterproductive. 
Gao sees no problem if SWFs, including CIC, are 
treated like other large institutional investors. 
However, CIC would be concerned if it believed it 
was being held to a separate standard.  If the 
U.S. wants to engage economically with a large 
transition economy like China which supports 
market reform, it will need to accept engagement 
with large state-owned enterprises.  CIC is 
seeking passive investments and is subject to 
less government direction than western countries 
assume. Gao perceives a shifting sentiment in the 
U.S. regarding the CIC that is distinctly anti- 
China; by comparison, the British have been the 
most positive and practical, the French most 
negative, and the Germans the most indecisive. 
End Summary. 
 
CIC Seeks Passive Investment, Not Control 
----------------------------------------- 
 
¶2. (SBU) In response to delegation concerns about 
CIC taking controlling stakes in its investments, 
Gao stated CIC does not want board seats and has 
instructions to take passive roles in its 
investments.  The Blackstone and Morgan Stanley 
deals are representative of the types of 
investment terms in which CIC is interested. 
 
Much Less Government Control Than the West Thinks 
--------------------------------------------- ---- 
 
¶3. (SBU) When the State Council created the CIC, 
it did not want to get involved in specific deals, 
according to Gao.  Reporters had it wrong when 
they said the Chinese Government was directly 
involved in CIC's investment in Morgan Stanley. 
The CIC did not even tell the State Council about 
the deal until hours before it was announced. 
However, the CIC has to work within the Chinese 
Government system while at the same time using 
market principles.  The CIC is operating on a 
commercial basis and has to take responsibility 
for its decisions.  Gao did acknowledge that 
long-term financial interests sometimes have a 
political component but this is no different than 
the blurred line that exists between the U.S. 
Government and U.S. business, he added. 
 
¶4. (SBU) Gao's interaction with government 
officials is mainly through informal channels. 
There is no regular contact regarding investment 
decisions, he stated.  Board members that 
previously worked for ministries, however, do 
report back to their old offices.  Former MOF 
officials rejected the first compensation package 
because pay was not tied enough to performance. 
They knew that the package would ultimately pass 
but they "had their own bosses to answer to," 
according to Gao. 
 
Future of CIC Depends on Performance and Profile 
--------------------------------------------- --- 
 
¶5. (SBU) CIC is an experiment; if it is deemed a 
success (including not attracting too much 
political controversy) it will get more funds to 
manage, explained Gao.  The financial return 
target is several percentage points above the 
rate of inflation.  Officials from Norway's SWF 
told CIC not to be too transparent on its asset 
allocation because markets will figure out the 
 
BEIJING 00001308  002 OF 004 
 
 
strategy.  CIC has instituted international 
benchmarks for all major asset classes similar to 
U.S. pension funds. 
 
If You Don't Want to Deal with SOE's, Walk Away 
--------------------------------------------- -- 
 
¶6. (SBU) In reply to delegation comments that the 
U.S. is concerned about transparency because 
government ownership can be an instrument of 
foreign policy, Gao commented that that the U.S. 
ultimately needs to decide whether it wants to 
engage economically with a large transition 
economy.  China is moving towards a free market, 
but in the interim, state enterprises will still 
play a role in foreign trade and investment.  CIC 
has sent letters to the SEC and other securities 
regulators saying it has no intent to control 
major businesses and is always open to uestions 
in response to market rumors about its activities. 
Some delegation members commented that the U.S. 
is going through a period of angst and stressed 
that U.S. policy on FDI has been much more stable 
than rhetoric.  Gao noted a similar situation in 
China. 
 
China's Perception of Unfair U.S. Treatment 
------------------------------------------- 
 
¶7. (SBU) In a uniquely Confucian interpretation 
Gao commented that the U.S., like a big brother, 
should be more helpful to China rather than 
saying China has to act in a certain way.  He has 
been working with the U.S. for a long time and 
feels there is a recent shift in sentiment, with 
the U.S. now less welcoming to foreign direct 
investment and foreigners.  One delegation member 
responded that this is because Americans do not 
see the bilateral economic relationship as 
balanced. 
 
¶8. (SBU) On the need for greater transparency for 
SWFs, Gao described U.S. corporate disclosure 
rules as draconian and questioned why specific 
classes of investors are being singled out. 
Commission members stressed that concerns about 
SWFs are not just about China, and all large 
money managers are required to disclose their 
holdings.  Gao replied that U.S. disclosure rules 
are understandable when institutional investors 
are investing on behalf of small investors, but 
less necessary when investors (like CIC) are 
investing their "own funds."  While Gao 
understands recipient countries' concerns about 
investments by government entities, if SWFs were 
treated differently than other large investors 
(hedge funds for example), or CIC is treated 
differently than some other SWFs (including the 
Alaska Fund), China would have concerns. 
 
¶9. (SBU) Delegation members noted that, in 
considering SWF policy, Congress will take into 
account the source of SWFs' assets, which is an 
important criterion.  Norway's resources are from 
non-renewable natural resources, while China's is 
from large balance of payments surpluses due in 
part to an undervalued exchange rate.  The U.S. 
also has unique concerns about national security 
in relation to China that differ from Norway. 
One delegation member noted that China will be 
treated differently in this regard.  Gao 
emphasized that the U.S. and China are too big to 
cut off trade and investment and the more the U.S. 
engages with China the more it promotes reform. 
CIC officials are the ones promoting reform in 
China.  Give us time, he emphasized.  Zhao 
Haiying, Chief of Strategic Asset Allocation and 
Research noted that "it takes two hands to clap" 
and that if the United States did not have a 
large current account deficit China could not 
have a large current account surplus.  She 
stressed that both sides need to work together to 
reduce imbalances between savings and investment, 
 
BEIJING 00001308  003 OF 004 
 
 
though the needed structural policies would take 
time. 
 
¶10. (SBU) One commission member said that China 
was violating its IMF obligations by manipulating 
its currency.  Zhao responded that many countries 
have rigid exchange rate regimes, there was only 
a consensus in the last few years that the RMB 
was misaligned, and that the rate of appreciation 
had picked up. 
 
IMF Unfair Regarding Best Practices, Transparency 
--------------------------------------------- ---- 
 
¶11. (SBU) When the CIC was founded Premier Wen 
established 3 principles for the organization: be 
transparent and responsible for shareholders, be 
responsible to markets, and obey laws of 
recipient countries.  This, Gao stated, is 
consistent with draft IMF principles on SWFs. 
The IMF, however, needs to be careful not to push 
too aggressively.  The Chinese public see the IMF 
suspiciously - a "tool of U.S. imperialism."  Its 
policies are directed at singling out specific 
countries.  If the codes of conduct are going to 
be voluntary, the IMF should support quietly an 
SWF-led process, and not take a leading role. 
More broadly, Western countries should give CIC 
time.  The CIC, he emphasized, is only six months 
old, and it took Singapore and other SWFs twenty 
years until they achieved transparency. "If you 
push too hard it will backfire", he added. 
 
Mixed International Reaction to CIC 
----------------------------------- 
 
¶12. (SBU) The British are dealing with the CIC 
better than the United States, according to Gao, 
focusing more on quietly addressing practical 
concerns and less on high-level political debates. 
This is more productive than talking at the 
Ministerial level and the "see a yellow face and 
get them out" attitude Gao sees in dealing with 
the U.S.  The French have been "hostile" and 
wanted CIC to agree to organizational changes in 
their bilateral communiqu during Sarkozy's visit, 
which CIC refused.  Sarkozy is going back forth 
on the issue of CIC's investment in France, he 
added.  Germany's Merkel appears to be changing 
her mind in response to German businesses' desire 
to do large deals. 
 
¶13. (SBU) CIC frequently consults with Norway's 
sovereign wealth fund.  Relaying their experience, 
Norwegian representatives noted that CIC is on 
the right path and that criticism will wane once 
other countries are more familiar with CIC's 
leadership and operations.  Gao repeatedly 
questioned why the United States is focusing on 
unrealized fears.  There is a natural tendency 
for SWFs to go to more welcoming countries, he 
added. 
 
Corporate Structure, Governance, and Remuneration 
--------------------------------------------- ---- 
 
¶14. (SBU) An eleven member board oversees the CIC 
which includes: five current government officials 
(Two Deputy Governors of the PBOC (including the 
Chair of SAFE), and Vice Ministers from the NDRC, 
Ministry of Commerce and Finance); three 
Executive Directors (the Chairman, General 
Manager and a Senior Vice President); two 
Independent Directors (retired Minister of 
Finance Xiang formerly Chair of the National 
Social Security Fund and Wang Xincheng, former 
Vice Chairman of the NDRC); and one 
representative of the working staff - a mid-level 
manager.  They meet a mandatory minimum of once 
per year but convene "from time to time". 
 
¶15. (SBU) Major policy decisions are made by the 
seven member Executive Committee which is 
 
BEIJING 00001308  004 OF 004 
 
 
comprised of the Chairman, General Manager, 
Senior Vice President, Chairman of the 
Supervisory Board, CIO, Deputy CIO, and Chief 
Risk and Finance Officer.  Other organizational 
structures include an International Advisory 
Board whose membership has still not be finalized 
and an Investment Committee which includes the 
Chairman, General Manager, Chair of the Committee 
and mid/front-line managers making specific 
investment decisions. 
 
¶16. (SBU) Salaries are based on the performance 
of the fund, however, general policy documents 
issued by the State Council limit compensation, 
which has been a major impediment to attracting 
investment professionals.  The salaries of the 
top seven executives are determined by the State 
Council and are not related to the public sector 
pay scale.  However, senior compensation is 
limited due to Premier Wen's concerns about 
public criticism of excessive salaries before CIC 
had established a successful track record.  While 
salaries should be generally market-based, they 
should "not be a major contributing factor 
between rich and poor."  Salary increases should 
be a little less than the fund's profit margin 
and executive pay raises should not increase by a 
much higher rate than the general worker's salary 
increase.  Gao noted that Singapore's SWF 
executives had very low salaries for the first 8- 
10 years. 
 
¶17. (U) The delegation has reviewed and cleared 
this cable.