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Viewing cable 08SHANGHAI210, CIC AND SAFE: SHANGHAI FINANCIAL INDUSTRY VIEWS, LATE MAY

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Reference ID Created Released Classification Origin
08SHANGHAI210 2008-06-05 08:17 2011-08-23 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Consulate Shanghai
VZCZCXRO1749
RR RUEHCN RUEHGH
DE RUEHGH #0210/01 1570817
ZNR UUUUU ZZH
R 050817Z JUN 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 6901
INFO RUEHGZ/AMCONSUL GUANGZHOU 1221
RUEHSH/AMCONSUL SHENYANG 1248
RUEHCN/AMCONSUL CHENGDU 1250
RUEHHK/AMCONSUL HONG KONG 1386
RUEHIN/AIT TAIPEI 1060
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBJ/AMEMBASSY BEIJING 1903
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7459
UNCLAS SECTION 01 OF 02 SHANGHAI 000210 
 
SENSITIVE 
SIPDIS 
 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN 
FRANCISCO FRB FOR CURRAN/GLICK; NEW YORK FRB FOR CLARK/CRYSTAL/DAWSON 
STATE PASS CFTC FOR OIA/GORLICK 
CEA FOR BLOCK 
USDOC FOR ITA/MAC DAS KASOFF, MELCHER AND OCEA/MCQUEEN 
TREASURY FOR AMB.HOLMER, WRIGHT AND TSMITH 
TREASURY FOR OASIA - DOHNER/HAARSAGER/CUSHMAN 
TREASURY FOR IMFP - SOBEL/MOGHTADER 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV CH
SUBJECT: CIC AND SAFE:  SHANGHAI FINANCIAL INDUSTRY VIEWS, LATE MAY 
2008 
 
1.  (SBU)  Summary.  Visiting Department economic analysts and 
Congenoff (Econoffs) met May 21-23 with Shanghai financial 
industry participants and regulators to discuss China's capital 
market development and sovereign wealth fund issues.  Most of 
the interlocutors agreed that the State Administration of 
Foreign Exchange (SAFE) is likely to play a more active role in 
investing China's foreign exchange reserves outside of U.S. 
Treasury bills, putting it in competition with China Investment 
Corporation (CIC) as the Chinese Government's primary vehicle 
for diversifying investment outside of dollar-denominated 
assets.  They were also confident that both the CIC's and SAFE's 
primary investment criteria would be high returns rather than 
promotion of other non-financial strategic objectives.   End 
summary. 
 
Introduction 
 
2.  (SBU)  In meetings from May 21-23, Econoffs met with 
Shanghai financial experts to discuss China's capital market 
development and sovereign wealth funds.  Participants included 
an American investor and management consultant with over 20 
years of experience doing business in China; an American 
financial consultant with expertise on sovereign wealth fund 
issues; Deputy Director-General of Statistics and Research Liu 
Mingzhi and Director-General of the International Department Luo 
Yang from the PBOC's Shanghai Head Office; a Citibank Managing 
Director; and former Morgan Stanley Chief Asia Economist Andy 
Xie. 
 
China Sovereign Wealth Fund Management and Goals 
 
3.  (SBU)  These several interlocutors downplayed or even ruled 
out the possibility that CIC might use foreign exchange reserves 
to promote non-financial strategic objectives.  The management 
and financial consultants suggested that highly professional 
fund managers at CIC would base investment decisions on returns. 
 Xie, however, suggested that bureaucratic incompetence and 
corruption would handicap CIC's ability to realize such returns. 
 The management consultant noted that this does not rule out 
possible CIC investments in sensitive areas such as Iran or 
Venezuela.  Nearly all also cited China's inadequate social 
safety net, particularly with respect to pension obligations, 
and the declining value of foreign exchange reserves, primarily 
in dollar-denominated assets, as the main reason for the 
creation of the CIC. 
 
4.  (SBU)  The financial consultant expects CIC will be a 
passive investor, confining itself to purchasing indexes and 
stakes below 10 percent of issued shares  This will allow CIC to 
quickly invest its $200 billion into a diversified and balanced 
portfolio.  He expects CIC will use Norway's Government Pension 
Fund as a model.  This, as well as public comments made by CIC's 
Managing Director, Gao Xiqing, suggest a commitment to 
transparency, which he notes will become more apparent as CIC 
makes more investments.  Xie, however, believes the CIC invests 
passively because its investment managers do not have the 
experience or expertise to make larger equity investments 
outside of financial institutions.  He co