Dragon on a Short Leash: An Inside-Out Analysis of China Investment Corporation

Sarah Eaton, Zhang Yuxuan
JEL codes: 
Working Paper No. 0821

Rapid growth in the number and size of sovereign wealth funds (SWFs) in recent years has occasioned a broad-ranging policy debate about how best to accommodate or, indeed, limit the participation of these funds in the worlds capital markets. The announcement in March 2007 that China would open an SWF, with an initial investment of US $200 billion, substantially raised the pitch of this debate as pundits and policymakers around the world pondered the impact that Chinas massive foreign exchange reserves could have on world markets. Among those worried about the SWF boom many argue, as Larry Summers has, that these funds shake the logic of capitalism because government-as-owner may well pursue objectives other than the maximization of share value. In a now-famous piece, Summers (2007) wrote: The logic of the capitalist system depends on shareholders causing companies to act so as to maximise the value of their shares. It is far from obvious that this will overtime be the only motivation of governments as shareholders. The worry is that governments may use equity stakes in foreign companies to attain strategic ends such as the re-direction of scare natural resources to their own countries, acquisition of cutting-edge technology and/or the support of national champions extension overseas. And, indeed, the investment record of two of the worlds oldest SWFs show that these funds can become entwined with governments pursuit of the national interest. The history of Singapores two SWFs, Temasek Holdings and Government Investment Corporation (GIC), making strategic investments in support of national champions including SingTel and Singapore Airlines is familiar to market-watchers. Yet other observers see newcomer SWFs as a largely benign by-product of the growth of the global current account imbalance since the late 90s: SWFs are a practical means for states to reduce the opportunity costs imposed by too-large accumulations of foreign exchange assets in the case of non-commodity funds and to diversify investments in the case of commodity funds. Since there are unimpeachable economic incentives to explain the recent profusion of SWFs, so the argument goes, what good reason is there to think that SWFs investment practices will have any motive other than wealth creation? As Steven Schwarzman (2008), chair of Blackstone Group enthused: Our experience with sovereign funds is that theyre smart, theyre long term, theyre highly professional. All theyre looking for is to earn the highest rate of return.
This paper is addressed to a question that is analytically prior to the Western policy debate about the global implications of Chinas sovereign wealth fund, namely: just what government is it that runs the China Investment Corporation (CIC)? Commentators in the West have tended to discuss the CIC as though it were an appendage of a unified government pursuing a clearly-defined national interest, as if it were the overseas finance arm of China Inc. Our analysis of the CIC shows that this black-boxing of the CIC can lead to serious misunderstandings about the funds investment strategy and also to an overestimation of the basic strength of Chinas SWF. In this paper, we trace the intense bureaucratic conflicts that shaped the creation of CIC and show how the conflicting mandates of the involved parties act as a significant constraint on CICs operations down to the present day. In the tradition of IPE scholars attuned to the inside-out causal mechanisms in the global political economy, we suggest that careful analysis of the domestic policy process ought to be a key component of our future efforts to analyze the likely impact of sovereign wealth funds on the global political economy.