HO: Do you see Central Huijin playing the “shareholder in chief” role in foreign corporations much like it does for domestic ones? How does this interact with state economic and national security interests?
ZZL: Sovereign funds investment can be the majority shareholder, but they are also a long-term institutional investor, meaning they put their money in for the long run rather than for the short term. Even if sovereign funds say that they want to be a silent partner in the investment, i.e., they don’t want to participate in the day-to-day management of a company, that does not necessarily mean they will have little influence. Although we haven’t seen a concrete case where Chinese sovereign funds or Norwegian sovereign funds for that matter exercise their coercive power, their presence is a formidable force to align companies’ incentives with those of the sovereign funds, especially if they want to maintain their long-term state-backed investors.
We do however see that CIC investments are quite closely aligned with Chinese government policy goals. It invested a lot in overseas resources when China’s resource demand was high, and it has also expanded into semiconductor companies and supply chain technology. There is nothing wrong with sovereign funds aligning their investment goals with the national agenda, but the extent of this mercantilism with that negative connotation is still a subject of debate.
HO: Does Chinese capital from their export surplus act similarly to those God-given resources that fund all these other sovereign wealth funds?
ZZL: China’s sovereign fund source revenue comes from manufactured goods exports, meaning the hard work of the Chinese people, whereas God-given resources like natural resources, oil, gas, or other types of mineral resources are not manufactured. I remember talking to a cab driver back when I was doing field research in China. I told him I wanted to go to the Poly Plaza, where the CIC is headquartered. and my cab driver asked me:
“Why do you want to go there?”
I said: “I’m going there for a meeting.”
And he said: “Oh, are you aware that they lost a lot of money during the global financial crisis? I’m not sure if we have fully recovered, they wasted my money!”
I find it interesting that the Beijing cab driver felt a sense of ownership. I guess it reflects the fact that people have a sense of ownership or pride in China’s exchange reserves, especially if that reserve comes from the accumulation of export manufacturing revenue and trade rather than just natural resources.
HO: Does China see its economic investment through its funds as part of international aid?
ZZL: That’s not aid. A grant is something that you give for free without the expectation of paying it back. Loans are given in return for interest payment or collateral. Sovereign funds work differently than aid, right? They are risk-bearing investments.
HO: How exposed is the CIC to the American Market?
ZZL: The CIC’s international portfolio is very much exposed to the U.S. market, but the majority of its assets are held domestically under Central Huijin. In 2017, during Trump’s first term, he went to China and one of his take-home achievements was a CIC-Goldman Sachs joint investment fund for the United States domestic market. Furthermore, when Trump signed his America First Investment Policy on February 21st of this year, he included specific terms to encourage passive Chinese investment. Depending on how people define passive, whether through a joint venture fund or a U.S. investment institution, the source of the money could still be from China, which would include the CIC.
HO: Do you think U.S.-China financial ties will grow, or do you think CIC might decide to divest from the American stock market and look elsewhere?
ZZL: From the CIC’s point of view, they want exposure to the American market because it is the largest financial capital market. On the other hand, there is a pull factor from inside China. There is an undercurrent of trade decoupling not only in part due to the Chinese government asking institutional investors to invest in China’s domestic industrial development, but also because Xi Jinping wants Chinese capital to support Chinese science and technology development. Trade tensions further strengthen that mentality which then restricts American capital investing in Chinese high-tech development from quantum computing to biotech, providing another push factor towards domestic markets. That being said, fund managers still want to have a geographic and asset class diverse fund with exposure to different business cycles.
HO: What is the purpose of these funds other than just adding to balance sheets? How much money are they really managing?
ZZL: I think the CIC’s assets are over $1.2 trillion right now which makes it at one point the largest fund in the world during COVID-19, but its market performance has since deteriorated. This is in addition to China’s $3 trillion in foreign exchange reserves and foreign exchange assets managed by the State Administration of Foreign Exchange. It’s quite a lot. Collectively you can imagine the foreign exchange reserves to be about the size of the UK’s GDP. Including China’s shadow (unofficial) reserves, the total is far larger than the UK’s GDP. This money can be a force for exercising financial or economic statecraft. For example, they can invest as support and divest to show dissatisfaction with a company’s performance or actions. They can support domestic industrial development and invest in foreign companies to get access to desired technologies or other assets they don’t already have. It’s certainly an economic power, but also a powerful political one.
HO: Does the CIC work in concert with or support other Chinese initiatives like the BRI?
ZZL: Back in 2016 and ‘17, I interviewed many people at the CIC who told me no. They said that they are independent and don’t work with the government and do not invest alongside government policy. In subsequent years, Tu Guangshao, the current president of the CIC expressed interest in setting up a BRI investment fund and if you look at what the CIC has already invested and supported, it is very much in line with the BRI’s existing projects.
HO: How has COVID-19 affected these funds? Were they able to respond to rapidly changing conditions?
ZZL: I honestly think COVID-19 is not the biggest shock for China. I would say U.S.-China tensions are bigger in part because their portfolio is extremely exposed to the U.S. market. They want to invest in U.S. companies in sectors from tech to natural resources, but broadly speaking, these funds in China, Norway, and Saudi Arabia are rainy-day funds to support domestic needs in times of economic stress. For China, it was an effective tool to absorb economic shock and provide a buffer for the national economy.
HO: Where do you see China’s economy going in the next few years? What challenges does it still face?
ZZL: China’s economy over the course of 2024 still suffered a lot of chronic structural challenges, even if it has stabilized a bit compared with immediately after COVID-19. The Chinese government and Xi Jinping himself have recently been meeting with Chinese private entrepreneurs to restore public confidence in the private sector, but to what extent the government can restore policy credibility is still a big unknown in the whole process. China’s sovereign leveraged funds can play a big role in stabilizing the stock market and have played a big role in that before, but they can also provide patient capital to support China’s R&D development. China’s economy is very much in transition, especially when they have some sectors that face excess capacity and other sectors that are booming. Sovereign funds can provide long-term capital to support the booming sector while providing stabilizing capital for the rest.
#Socialisms #Trillion #Dollar #Chinese #Characteristic #Zoe #Liu
