3. Quite a bit has been written about SWFs, much of it speculative because of lack of factual data and iffy estinates of the future (does anyone believe that current trade imbalances will go on unarrested for more than 10 years?) but it seems to me that people miss the following points, which apply to China in particular:

- structured pools of money are merely a policy tool, and it is the circumstances and policy responses, not the tools that we should worry about
- the obvious fact that the IMF-SWF dialogue is unlikely to produce anything that will constrain the policy response of certain countries to the circumstance that they have to invest abroad for FX management reasons (themselves highly debatable) whilst they are also still quite backward in terms of social and human capital, in fact unable to absorb the volume of physical capital that they are generating. The only effect might be that the outflow will get a different label.

4 Ideally (assuming some sort of budget constraint growing out of the accumulation of external deficits in a small group of countries) there should be a multilateral regulatory regime that would allow complete freedom of international investment to state entities only for (a) pensionfunds (ie with identifiable claims and claimants) provided these conform to a minimum standard of disclosure and governance (b) Norwegian style funds with the same rationale (substitution of state mineral wealth by external financial wealth, but no identifiable claimants) and similar levels of governance and disclosure and (c) tribal funds (ADIA etc) where it is diffcicult to make a distiction between the state and the ruler’s tribe or alliance of tribes. However in the latter case investments should be transacted via licensed intermediaries conforming to a high level of counterparty risk management and regulatory compliance. None of these categories should have more freedom to manipulate markets that ordinary commercial investors. Anything else, and especially central banks, should restrict investment to government paper and qualifying (e.g. sponsored by the CB/bank regulator of the recipient country) bank deposits. Strategic style investment, a la Temasek and power trading a la ADIA should be regarded as potentially hostile state behaviour and dealt with bilaterally. Recipient countries should have the right to deny government stakeholders voting rights for reasons of national interest (whatever that may mean) and transactions resulting from market manipulation unwound at the expense of the initiating souvereign..This should punish those who want to sterilize but not accept the carrying cost of idle FX balances, those who want to play the lottery with state funds and spoil markets in the process, and repel those who want to undermine my national interest by exploiting temporary weakness of my country’s industrial crown jewels.

Now, that would be a show of economic sovereingty on the part of the recipients.

I actually think the CIC has more than one objective. It existts to support China’s fx regime by helping to sterilize reserve growth. That could imply constraints on its portfolio allocation across currencies that conflict with its return objective. It clearly means that it cannot invest domestically even if domestic investments would produce higher returns — ergo, it is a sovereign fund with an expected negative net worth in its own currency.

Moreover, the moment the CIC got the SCBs, it clearly got an additional objective — namely protecting china’s strategic objectives in the financial sector.

And I saw in this week’s FT a CIC official was quoted to the effect that supporting SOEs going forth is one of the CIC’s goals (it was in the context of Huawei’s bid for GE). It certainly has been a goal of the state banks (note CDBs financing of Chinalco) and i am not totally sure that their activities can be distinguished when:

a) the CIC owns the state banks, so coordination is certainly possible (noting 2fish’s argument that such coordination is rare in practice in cHina)

b) the fx the state banks have orginated from the recap and various government policy initiatives (swaps, required reserves that are held in $).

I think a fair argument can be made that the CIC and SAFE have effectively hired the state banks to manage some of their fx, which would make them accountable for the actions of the state banks.

And yes, I meant foreign equity market exposure. I don’t worry about what sovereign funds do inside their own countries; that is there business and don’t distort the global flow of funds.

a) that most SWFs are autonomous from the government (and more autonomous than central banks reserve managers)

and b) the cIC has been set up to be something other than a tool of state policy.”

Really sloppy writing from me there and I apologise for it: what I should have said was that CIC, unlike SAFE, only has one policy goal to pursue – make money for itself – and that this unity of purpose makes it more immune to the kinds of “what’s the real agenda” criticisms that multi-tasking agencies like SAFE face from foreign scrutineers.

I fully respect your view of the bone-headedness of folding ABC, CDB et al into CIC if immunity from such criticism was a design goal. I think MoF and others saw the anchor stakes NCSSF had in a number of banks as a model worth following to provide future funding to CIC and didn’t think through all of the implications. Neither of us are looking to China for evidence of policy genius. I think how they treat those banks – particularly what they refuse to do for them/allow them to do – is going to be closely watched and I’m at least reasonably confident that CIC aren’t going to deprive themselves of any opportunities by favouring their temporary wards.

I’m not sure that the FT’s question about CIC’s role supporting SOEs is really all that valid (and, to be fair, the FT didn’t allege that CIC had that role, only that no-one at the time was absolutely sure if it did or didn’t.) Since that article was published last December, CIC officials have been asked 100 times in 100 venues what they planned to do to support SOEs. They’ve answered “nothing – it’s not our job” 100 times and no action that they’ve taken appears to contradict that statement. If there’s one Chinese governmental investor that appears determined to colour inside the lines at the moment, it’s CIC…

bsetser: “SAFE almost certainly has more equity market exposure than the CIC.”

I took this to mean total equity exposure, not foreign equity exposure. On foreign exposure, you may well be right. I would be surprised to learn that CIC’s foreign equity holdings – including the nearly-completed first mandates – exceed USD30bn. My USD135bn figure includes domestic equity.

The CIC reports to the state council. the CIC’s board is made up of government ministries. I fail to see the difference.

It strikes me that the CIC is institutionally far more a creature of China’s government than an independent body making arms-length investments.

And I would rather surprised if Hu and Wen cannot order someone at the CIC to be fired. the CIC’s investments — the big ones at least — all seem to have required state council approval. IF there is an arms length relationship there i just don’t see it.

In the case of CIC there is a board of directors that insulates the activities of CIC from the State Council. There isn’t this layer of insulation with SAFE.

Wen Jiabao doesn’t have the legal authority to directly order CIC employees to do anything. He can withhold approvals, and there are other ways that he can get his way, but these are direct and information. He does have the legal authority to order SAFE to do something. CIC is owned by the state but not part of it, while SAFE is part of the state, and that makes the rules quite different.

My reading of the SAFE action is that the central government has decided that they want more control over how reserves are invested.

My estimate is based on the fact that the US data showed $25-30b in Chinese holdings of US equity at the end of q2 07, with almost all of the increase coming from mid 06 to mid 07. I assumed a comparable or slightly lager flow in 07/08 (we are getting close to end june) — something that is consistent with anecdotes that SAFE has been buying equities in its own name/ SAFE’s activities in Australia and Europe. I also arbitrarily assumed that the US accounts for maybe 50% of SAFE’s equities, which generates ball park of around $50b in US equities/ $100b in global equities. That is roughly 5% of China’s total reserve assets (assuming ongoing growth) — a sum that “feels” reasonable.

I am curious how you estimated $130 for the CIC — I accept that it is likely that they got $210b – $70b (huijin) – $20b (CDB) by the end of March. But some of that will be set aside for ABC methinks, tho less than initially forecast. That leaves roughly $100b. And maybe not all of that will be in equities and perhaps not all of that has been invested as of now — I was under the perception that the CIC hasn’t formally awarded a lot of mandates yet, but that is very third hand information. I suspect that others have better data than I.

I disagree a bit tho with two of your arguments:

a) that most SWFs are autonomous from the government (and more autonomous than central banks reserve managers)

and b) the cIC has been set up to be something other than a tool of state policy.

on a) ADIA, GIC and the CIC all report directly to the top level of their respective governments. there is no arms-length relationship as far as I can tell. ADIA’s board is basically drawn from a single family … that need not imply a decision to invest for non-commercial reasons (ADIA has tried to avoid doing that, Abu Dhabi’s big domestic investments have been done through other state vehicles) but there is a very close relationship. Here the CIC fits with a broader pattern.

and on b) it is hard for the CIC to be seen as a purely commercial investor when it is the holding company for strategic stakes in state banks and it is reported (per the FT Huawei story) to have a mandate that includes supporting outward investment by SOEs.

In that sense, SAFE — as a manager of external assets — is purer.

I fully agree with your point that a central bank that feels free to invest in an illiquid PE fund with a long-tie up period clearly has more fx than it needs for conventional central bank purposes.

So long as there is adequate regulatory oversight of state-owned funds, I don’t see anything wrong with them? Without the proper regulation of financial markets, the inevitable result is Enron, Worldcom, Fannie Mae, Countrywide Mortgage, Tyco, Freddie Mac, Bear Stearns, etc. With the current “anything goes” regulatory environment, we are sure to have more “blow-outs” in the financial market. Capital is lazy too without regulatory discipline.

its getting out of hand , i am afraid