<P><FONT size=5>UBS：联汇让人迷惑？-中国拟发行的特别国债 Confused About the CIC?</FONT></P>
<P><FONT size=5>UBS Investment Research Asian Focus</FONT></P>
<P><FONT size=5>28 June 2007 5页</FONT></P>

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<P>And so it begins – after months of speculation over the size and funding of China’s sovereign foreign<BR>investment vehicle, the China Investment Corporation (or CIC; in previous reports we generally referred to<BR>the institution as the State Investment Corporation, but it looks increasingly likely that the English name will<BR>be the CIC), we now have information on both. The government announced yesterday that the National<BR>People’s Congress is formally reviewing a State Council plan to fund the vehicle with RMB1.55 trillion, or<BR>roughly US$200 billion, in long-term domestic-currency bonds issued by the Ministry of Finance.<BR>This has raised a host of questions on the details: how the subsequent FX transactions will be carried out,<BR>what the liquidity impact will be, whether this would affect the real economy, etc. And here are our answers:<BR>1. At the macro level we don’t expect any liquidity impact from the creation of the CIC, regardless of the<BR>detailed arrangement chosen. And thus no impact on the real economy.<BR>2. The real impact of the CIC at home will be a portfolio shift away from short-term debt to long-term debt<BR>holdings in the financial system.<BR>Before we jump into the details, let’s review our understanding of how the CIC will work (from the funding<BR>side, at least; much has been said already about possible investment strategies and we have little to add here).<BR>At present there are three expected components to CIC operations: (1) a transfer of existing FX reserves from<BR>the PBC/SAFE to the CIC, which now seems set at US$200 billion, (2) a separate assumption of ownership<BR>of Central Huijin Investment and other domestic investment vehicles, estimated at US$100-150 billion, and<BR>(3) additional flow accumulation of new FX funds over time, funded by future bond issuance, to the expected<BR>tune of US$5-15 billion per month.<BR>This</P>