China’s CIC Vows to Better Investment Management After Audit

Jun 19, 2014 5:57 am ET

(Updates with analyst comment in fourth paragraph.)

June 19 (Bloomberg) -- China Investment Corp., the nation’s $575 billion sovereign wealth fund, said it is improving how it manages overseas investments after state auditors said mismanagement led to losses.

The fund has drafted plans to rectify issues identified by the National Audit Office, analyzed the causes, and is amending related mechanisms and procedures, Beijing-based CIC said in an e-mailed statement. CIC, as it’s known, will also strengthen due diligence for overseas deals and enhance post-investment management, and standardize the selection of external managers, according to the statement.

An audit last year found dereliction of duty by managers, and inadequate due diligence and management in 12 investments made abroad by CIC between 2008 and 2013, leading to losses, according to results published yesterday. CIC, set up in 2007 to manage part of China’s foreign reserves, is the world’s fourth- largest state wealth fund, according to the Las Vegas-based Sovereign Wealth Fund Institute. Founding Chairman and Chief Executive Officer Lou Jiwei, replaced last year by Ding Xuedong, is China’s finance minister.

“These problems can largely be regarded as legacy issues,” said Ivan Shi, a Shanghai-based analyst at consulting firm Z-Ben Advisors Ltd. The audit report can serve “as a reminder to the current senior executives in CIC to improve its process and best practices.”

‘Dealt With’

The fund’s financial and information management is weak, accounting policies for overseas investments are “not prudent enough,” and it wasn’t strict in enforcing its personnel management and accountability measures, according to the audit report. Auditors also said CIC’s selection of external managers for some overseas investments was “not very standard,” according to the report, which didn’t elaborate.

CIC “has dealt with” employees responsible for issues regarding the overseas investments, the fund said today without being specific. The audit office said yesterday it transfered cases of suspected legal or disciplinary violations to the authorities for investigation.

The company has amended its accounting practices for private-equity investments, it said, after auditors found that $10 million in payments received from some such deals were kept out of its formal accounts at the end of 2012.

Auditors also found irregularities at CIC’s domestic units. Among them, Central Huijin Investment Ltd. forwent 1.26 billion yuan ($202 million) in potential investment gains in 2011 by selling a stake in a local securities company at the cost price, and not conducting an asset appraisal as required, according to the report.

Central Huijin

CIC has ordered Central Huijin and other units to enhance management of asset transfers and strictly follow appraisal rules, the fund said today. A domestic subsidiary that invested 8.3 billion yuan in property development in violation of its mandate “is quickening the disposal” of such assets, it added.

CIC’s overseas portfolio includes shares in Wall Street firms, such as Morgan Stanley, GCL-Poly Energy Holdings Ltd., the world’s biggest polysilicon maker, and Sunshine Oilsands Ltd., a Canadian energy producer.