All roads to Beijing still go through Shanghai, at least when it comes to positions of financial power in China.
Tu Guangshao, the vice mayor of Shanghai with a reputation as an advocate of financial liberalization, is set to be named as the new chairman of China Investment Corp., the country’s sovereign wealth fund. Although the government hasn’t made a formal announcement, sources in Beijing say it will do so in coming weeks. Tu will replace Lou Jiwei, who has led CIC since its founding in 2007 until his appointment as Finance minister in March.
Tu, 54, is a sophisticated politician with ties to President Xi Jinping and has a deep background in financial matters. He spent five years as vice chairman of the China Securities Regulatory Commission before he was appointed as Shanghai’s vice mayor in charge of finance in 2007. His appointment further solidifies Shanghai’s position as the preeminent financial center on the mainland, say experts in Beijing and Shanghai who know him well.
“He’s a good guy; he’s open minded,” says Peter Alexander, managing director of Shanghai-based financial consulting firm Z-Ben Advisors, who first met Tu when he was head of the CSRC office overseeing exchanges in the late 1990s. “He’s more reform-minded. He is open to looking at whatever he has under his portfolio to expand the financial services industry.”
As vice mayor, Tu pushed aggressively for Shanghai to win official recognition from the central government as China’s only onshore international financial center, ahead of rivals such as Tianjin, Dalian, and Zhengzhou — all cities with either futures exchanges or ambitions to establish themselves as financial centers. In 2008, former premier Wen Jiabao declared Shanghai to be the country’s leading financial center.
“He’s been an ardent proponent of continuing to move forward in opening up, of course with Shanghai taking the lead in that process,” Alexander says.
At CIC Tu’s main task will be to help the sovereign fund gain stronger political support at the highest echelons of power. CIC has been engaged in a struggle for resources with the State Administration of Foreign Exchange, the central bank arm that manages China’s foreign reserves and sees CIC as encroaching on its territory. The elevation of Lou indicates that the leadership has sided with CIC, sources say. The sovereign fund’s investment process and strategy, which is led by president and CIO Gao Xiqing and has focused recently on resource plays in emerging markets, is not expected to change.
CIC has an estimated $525 billion in assets under management, according to Institutional Investor’s Sovereign Wealth Center, but it is, in effect, two entities. Central Huijin Investment, a subsidiary that holds the government’s controlling stakes in China’s five largest banks and dozens of other financial institutions, has $337 billion in assets. CIC International, the subsidiary that is the effective sovereign wealth fund as far as international markets are concerned, runs most of the remaining assets, including all of the company’s overseas investments. Those holdings include sizable stakes in investment bank Morgan Stanley, Canadian mining company Teck Resources, Thames Water Utilities in the U.K., France’s GDF Suez Exploration and Production International and Brazilian investment bank BTG Pactual.
“CIC is a highly complex organization with very talented, ambitious people who know that every day is a high-stakes game,” says Paul Schulte, a former Hong Kong–based strategist at Lehman Brothers and Nomura Securities who now publishes The Bull’s Eye Report, which focuses on emerging markets. “There are hundreds of potential investments pouring in every week. It has investments on five continents with a great deal of political input concerning strategic investments. This requires a highly capable person who is a master at organization and an astute politician more than anything else.”
Laurence Brahm, a Beijing-based American lawyer who advises to the Chinese government on international and financial affairs, predicts that Tu will work well with Gao. CIC “has a huge amount of state assets under its management,” he says. “Therefore, you need to have a check and balance between the investment management skill set someone like Gao Xiqing brings and someone well versed in China’s political structure, which the new chairman brings. They will be a great team.”
Tu became vice mayor in 2007, about the same time that Xi was appointed party chief of Shanghai. Xi held that post for only six months before winning promotion to Beijing as vice president; he assumed the presidency in March. Tu’s connections to the president played a significant role in his appointment at CIC, observers say.
“Tu is a political rising star,” says Brahm. “Tu is effectively a minister now. CIC has a ministerial ranking. It is very powerful, in terms of what it controls.”
With former chairman Lou now heading the Finance ministry, CIC is likely to get even larger in the years ahead. Beijing injected $30 billion into CIC International in December 2011 in a bid to diversify the country’s massive reserves.
Z-Ben’s Alexander says he wouldn’t be surprised if CIC overtakes Norway’s $753 billion Government Pension Fund Global as the world’s largest sovereign wealth fund in coming years.
“The odds are very, very strong that CIC could be the largest sovereign wealth fund globally in the next five years,” he says. “It grew from $200 billion in 2007 to nearly $500 billion in 2012. It stands to reason if it goes up, it could surpass Norway somewhat easily. The most likely [way] of that happening would be an injection from Ministry of Finance.”
