The US$200 billion sovereign wealth fund of China Investment Corporation (CIC) officially started operating on Saturday, but analysts said it is set to face major challenges.

Lou Jiwei, deputy secretary-general of the State Council and former vice-finance minister, is chairman of the board of directors, and Gao Xiqing, former deputy chairman of the National Council for the Social Security Fund, is the general manager, according to a statement released at the company's opening ceremony in Beijing.

Major members of the company's management are from government ministries.

One of the world's largest sovereign funds, the new company has triggered sentiment of protectionism in some Western countries fearing it may bloat prices in their capital markets.

Lou said at the opening ceremony the company will operate in a transparent manner and stick to the principle of "commercial operation".

The company will abide by local laws and regulations as well as international practice, he said.

The CIC will focus mainly on an investment portfolio of overseas financial products and commit itself to maximized long-term returns on a risk-adjusted basis, the statement said.

The company's management did not disclose how much of the fund will be available for overseas markets. Previous media reports said about one-third of its capital, or US$67 billion, will be used to buy the assets of Central Huijin, the State investment vehicle that holds the government's shares in State banks.

Lou praised the role of Central Huijin in pushing China's financial reforms at the ceremony.

It has ensured the success of shareholding reforms in a number of major State financial institutions and helped them improve management, he said.

The CIC may set aside billions of dollars more for the future recapitalization of State financial institutions, media reports said.

This will leave the CIC with much less to invest. "It may be left with less than US$100 billion," Dong Yuping, an economist with the Institute of Finance and Banking of the Chinese Academy of Social Sciences (CASS), said.

Dong said as the current US credit crunch makes its economic growth uncertain, and further cuts in interest rates by the Fed may affect global financial markets.

"This will bring serious challenges to the CIC," Dong told China Daily.

Although the establishment of the company is necessary, as the country has accumulated more than US$1.41 trillion in foreign exchange reserves, protectionist sentiment in other countries will limit its investment, Liu Xiahui, an economist with the Institute of Economics of CASS, said.

"The political pressure from them will be huge," he said.

Liu said the company should focus on emerging markets to ease the protectionist sentiment.

Yang Di, a researcher with the Shanghai Academy of Social Sciences, suggested the company outsource some of its investment portfolio to domestic or international professional agencies.

(China Daily October 1, 2007)