China Investment Corporation has vowed to improve its internal systems after being publically criticised by the National Audit Office for inadequate due diligence and investment monitoring and irregular external manager selection.
It is understood to be the first time that CIC has been publically admonished by the country's top auditor in this way.
The $575 billion sovereign wealth fund issued a statement yesterday in response to the report by the National Audit Office, an institution set up in 1982 to supervise government revenues and expenditure.
The auditor’s report had outlined weaknesses in CIC’s due diligence and performance monitoring for 12 overseas projects that CIC had invested into as far back as 2008. The Chinese sovereign wealth fund was established the previous year, in 2007.
The report did not identify the projects by name. It said only that six of them had realised losses, four had unrealised losses and two were facing potential losses, although it did not reveal the extent of these losses.
The audit was conducted last year based on CIC’s 2012 annual financial report. Its findings highlighted irregularities in CIC's external fund manager selection process for several projects. However, it did not identify what these non-standard practices were.
Moving away from its overseas investment process, the auditor pointed to weak risk control at several of its domestic subsidiaries, mentioning six by their Chinese names.
One common problem was that its local units had moved away from their directed mandates, particularly in real estate. For example, one unit set up to focus on primary land development had actually invested Rmb8 billion ($1.3 billion) in property development projects.
Another subsidiary, a trust company, was found since 2011 to have helped property developers raise a total of Rmb949 million via trust products when many of the property projects in question did not have all the required permits.
Further, Central Huijin, another of CIC’s subsidiaries, had transferred an equity stake in a local securities firm in 2011 without doing an asset appraisal, missing out on a potential gain of Rmb1.2 billion.
The National Audit Office blamed CIC for weak enforcement in personnel management and accountability.
In response, the sovereign fund pledged to rectify the problems identified in the report. It said it would enhance its investment procedures and internal systems for overseas investment, including improving accountability, fund manager selection process, due diligence and post-investment performance monitoring and management.
CIC also stated that it had dealt with the personnel in question, although it did not specify how and what this meant.
As for its subsidiaries, CIC said it would require them to conduct appraisals on all investments to ensure transactions are done properly, and would make them return to their stated mandates, including exiting their property development projects.
The sovereign fund added that the trust company highlighted in the auditor’s report had tightened its guidelines on trust products with underlying property investment.
The National Audit Office confirmed that CIC had introduced or revised 29 guidelines and refined seven internal systems in response to its report.