China Auditor Blames CIC Mismanagement for Investment Losses

Mismanagement at China Investment Corp., the nation’s $575 billion sovereign wealth fund, led to overseas investment losses that could widen, according to the National Audit Office.

A dereliction of duty by managers, and inadequate due diligence and post-investment management were identified in 12 investments made abroad by the fund between 2008 and 2013, according to results of an audit conducted last year, that didn’t identify the individual cases. Six of the deals were unprofitable, four of them had unrealized losses, and two may potentially lose money, according to the report released today on the auditor’s website, which didn’t name the investments or disclose their size.

CIC, the world's fourth-largest sovereign wealth fund, reported a 10.6 percent return on its overseas portfolio in 2012 as global equities rallied, reversing a 4.3 percent loss in 2011, according to company statements. Returns exceeded 8 percent last year, Vice President Liang Xiang said in March. Founding Chairman and Chief Executive Officer Lou Jiwei, replaced last year by Ding Xuedong, is China’s finance minister.

“It seems like problems were found at every step in the process, which could be because of something wrong in their system design rather than just some human errors,” said Li Jie, head of the foreign-exchange-reserve research center at the Central University of Finance and Economics in Beijing. “That sends a relatively negative message to everyone.”

CIC’s Beijing-based press office didn’t immediately respond to an e-mail seeking comment.

Domestic Units

The company’s financial and information management is weak, accounting policies for overseas investments “not prudent enough,” and the fund was not strict in enforcing its personnel management and accountability measures, according to the report.

CIC’s overseas portfolio includes Wall Street firms, such as Morgan Stanley, and GCL-Poly Energy Holdings Ltd., the world’s biggest polysilicon maker, and Sunshine Oilsands Ltd., a Canadian energy producer. The fund hasn’t announced any deal itself since 2012.

Auditors also found irregularities at CIC’s domestic units. Among them, Central Huijin Investment Ltd. lost 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.

A domestic subsidiary invested 8.3 billion yuan in property development as of March 31 last year even though the mandate was to just develop land, while another unit bought almost 300 million shares in Bank of Shanghai Co. in 2011, without a required asset evaluation, the audit office said.

Auditors also said CIC’s selection of external managers for some other overseas investments was “not very standard,” according to the report, which didn’t elaborate.

CIC was set up in 2007 to manage part of China’s foreign reserves. It is the world’s fourth-largest state wealth fund, according to the Las Vegas-based Sovereign Wealth Fund Institute.

— With assistance by Dingmin Zhang

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