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*China eyes shake-up of bank holdings*

By Henny Sender in Hong Kong

Published: July 5 2010 19:37 | Last updated: July 5 2010 19:37

China is considering stripping its $200bn sovereign wealth fund of the
country’s banking stakes, in a move that could free it of some restrictions
when it invests in the US.

People familiar with the matter said that, under the proposal, China
Investment Corporation would no longer be responsible for holding the
state’s majority stakes in the country’s biggest banks, such as *Bank of
China <http://markets.ft.com/tearsheets/performance.asp?s=hk:3988>*.

The move would end CIC’s status as a bank holding company in the eyes of the
Federal Reserve Bank of New York.

That would liberate CIC of certain restrictions when it makes investments in
the US, where it is believed to be targeting equities, bonds and real estate
deals.

The bank stakes were valued at about $70bn when CIC was established in 2007,
but it is not clear whether the fund will be recompensed for the loss of
these holdings.

If CIC does receive payment in return for the shares, the fund will nearly
double overnight the amount of liquid cash on hand for investing.

The proposal is being championed by Wang Qishan, the vice-premier in charge
of finance, according to bankers.

The reform represents the latest episode in the long-standing bureaucratic
tussle between the finance ministry and the People’s Bank of China, as each
struggles to oversee the big state banks.

CIC was established to invest a portion of China’s huge foreign exchange
reserves abroad in order to gain better returns.

But since taking over Huijin – a holding company housing the state’s shares
in the big lenders – it also found itself at the heart of the banking
system.

When Huijin was first set up in 2003, it was considered a power grab by the
central bank to reduce the finance ministry’s influence over the banks. But
when Huijin was transferred to CIC in 2007, it was considered a coup for the
ministry.

“CIC’s establishment was always less about [being] a sovereign wealth fund
than a bureaucratic turf battle,” say authors Carl Walter and Fraser Howie
in a forthcoming book about China’s financial system.

Some senior Beijing policymakers are pushing for Huijin to be spun out of
CIC and handed ownership of the government’s stakes in financial groups,
including the large state-owned insurance companies.

They also want Huijin to be governed directly by the State Council, China’s
cabinet.

Such a change is likely to spark political turf wars over control of the
banks’ huge dividend streams.

The dividends the banks pay the government currently go to CIC, swelling its
returns and giving it welcome cash flow at a time when most of its
investments are too young to have produced significant returns.

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Mike Muldoon

Rosemont Seneca Partners, LLC

1010 Wisconsin Ave., NW

Suite 705

Washington, DC 20007

(202) 333-1880

mmuldoon@rosemontseneca.com <eschwerin@obblaw.com>

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