Globally Imbalanced

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China Goes Continental

(originally published at shadowbankers.wordpress.com on April 22nd, 2009)

Asia’s answer to the yearly Davos gathering, the Boao Forum of Asia, ended last week with some choice words from Lou Jiwei, chairman of the China Investment Corporation (CIC), China’s primary sovereign wealth fund (SWF). Mr. Lou, in a tone ironic enough to satisfy even the snarkiest of us bloggers, indicated China’s intention to reexamine investment opportunities in Europe:

“I have to thank these European officials. They saved me a lot of money. Now they come to me without conditions and I am beginning to consider making investments in Europe again.”

SWFs like the CIC invest government assets such as FX reserves or oil-related revenue in high-yield, long-term investments around the world. SWFs have existed for decades, investing the capital of oil-rich nations like Kuwait and Abu Dhabi. But recently, they’ve ballooned in size as a result of global trade imbalances and the rapid increase in oil prices. While their capital has been welcomed by the likes of Morgan Stanley, skirmishes such as the congressional blow-back against the Dubai Ports Deal ahead of elections in 2006 remind us that domestic distrust and political posturing still cary enough weight to stifle a business transaction involving a foreign government.

This was the case when Lou and Co. approached European officials in 2008. Even after their numerous ventures into U.S. markets, the Chinese did not find a receptive crowd in Europe. The resistance was due in large part to the lack of transparency in the operations of the CIC. As the IMF noted in 2008, the CIC operates with a level of opacity on par with the SWF of Russia, and other SWFs in the Middle East and Africa, which suggests that the opacity is itself the result of a desire to cloak the political motivations behind the investments. This is, of course, the argument of choice for those justifying their resistance to the CIC.

The SWF of Norway, the Government Pension Fund (GPF), on the other hand, has been dubbed an industry leader in disclosure practices and transparency by the IMF. European officials drew on the comparison between the CIC and the GPF in trying to bargain a ban on voting rights and a 10% ownership cap for any European interest held by the CIC. Lou responded to that proposal with the same, seemingly characteristic sense of humor:

I said I can’t accept this. They said Europe doesn’t welcome me, so I said fine, if Europe doesn’t want me, I won’t go, ” Mr. Lou said. “So I want to thank these financial protectionists, because as a result, we didn’t invest a single cent in Europe.”

Since the financial crisis has drastically limited the amount of credit available globally, Sovereign Wealth Funds will become even greater forces in global trade. Even though many increased their risk-taking immediately before the financial crisis and suffered losses as a result, collectively, SWFs still sit on a significant amount of global capital (estimated $3.8 trillion in 2008). As a result, they will continue to be major players in the capital markets and, as the Europeans have learned the hard way, should be welcomed into domestic markets.

And as for our friend Lou, he had no problem noting this significant change in attitudes towards Chinese capital:

“Europe is now very welcoming to us, and isn’t talking about such conditions any more. People suddenly look at us as a lovable force.”

Filed under: SWFs, , ,

About Me

Former emerging markets currency trader in NYC for seven years, turned MBA student at INSEAD living in Singapore.