China’s Auditor Says Sovereign Fund Mismanaged Assets

China’s Auditor Says Sovereign Fund Mismanaged Assets
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The National Audit Office blamed China Investment Corporation, the country’s $575 billion sovereign wealth fund, for some of its investments leading to losses.

The country’s top auditor did not, however, specify the size of the loss.

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Investment losses could widen

According to results of an audit conducted last year by the National Audit Office, dereliction of duty by managers, and inadequate due diligence and post-investment management were identified in 12 investments made abroad by China Investment Corporation, the world’s fourth-largest sovereign wealth fund.

The report released today on the auditor’s website, however, didn’t identify the individual cases. However it pointed out six of the deals were unprofitable, four of them had unrealized losses, and two may potentially lose money.

The Chinese sovereign wealth fund clocked 10.6% return on its overseas portfolio in 2012 thanks to rally witnessed in global equities. The fund reported a 4.3% loss in 2011 and over 8% profit last year.

Irregularities observed in China’s sovereign wealth fund

According to the audit report, the sovereign wealth fund also breached regular procedures when it hired external managers for a few of its foreign projects. Moreover, several CIC units within China, such as Central Huijin, China Jianyin Investment, China Investment Development Co and China Zhongtou Trust Co, were also found to have irregularities in their businesses. Some of the irregularities noticed include breaking away from their core businesses and venturing into the real estate sector, as well as funding illegal property projects.

The auditor also observed that six Bank of China branches disbursed 6.4 billion yuan ($1.03 billion) of loans that violated China’s lending policy over the past 10 years. It did not say if it conducted similar checks at other bank outlets.

Interestingly, last year the National Audit Office warned about risks threatening China’s economic development and called for better management of finances. The auditor general at NAO warned China’s politicians that local governments must manage their debts and investments or run the risk of derailing economic development. The auditor general’s report also disclosed that some enterprises falsified sales volume or costs to either meet quotas or evade taxes. Furthermore, 45 projects were launched without adopting the proper approval procedures.

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