Research On Foreign Direct Investment Risk Of China’s Sovereign Wealth Fund

With the increase of foreign exchange reserves, the Chinese government established the China Investment Corporation (CIC) in September 2007, to explore the channels and ways of using its massive foreign exchange reserves and to improve the efficiency of management and profitability. However, there are many problems in risk management of CIC with lack of investment experience. All above is the background of this paper.Firstly, this paper analyzes the current situation of China’s Sovereign Wealth Fund. Compared with the Government Pension Fund-Global of Norway, Temasek Holdings and Australian Government Future Fund, this paper summarizes the experiences of these three SWF that CIC can refer to.Secondly, based on the existing research, this paper divides the investment risk of China’s Sovereign Wealth Fund into two parts:political risk and economic risk.Then, this paper selects three variables to measure the political risk component:the attitude of the government toward FDI, the degree of conflict for the country, and perceived corruption within the country; three variables to measure the economic risk component:gross national income per capita, inward FDI potential, and the inflation rate to construct the Foreign Investment Risk Matrix (McGowan& Moeller,2009) and Apply it to the four main countries (districts) of foreign investment of CIC:USA, Canada, UK and Hong Kong.Finally, this paper measures the exchange rate risk of these four countries (districts) using the commonly used VaR model. Adding the exchange rate risk to the economic risk of FIRM, this paper constructs the improved Foreign Investment Risk Matrix ana also applies it to the four countries (districts). In the end, this paper analyzes the situation of UK, for the verification of theory and reality.