by Ashby Monk
Many US policymakers cite the potential for SWFs to invest based on geopolitical, rather than financial, criteria. This begs the question: how can you reliably differentiate between the two? Significantly, based on our recent in-depth discussion with Dr. Ted Truman on this issue, it would appear that you can’t. Dr. Truman argued that even when SWFs’ motives are not political, they will still be seen to be because they are inherently political institutions. He pointed to the example of recent SWF investments in US financial institutions: many people view these investments as strategic geopolitical moves, but there is no way to demonstrate this reliably. In short, the only way to pin down a SWF investment as political, Dr. Truman suggested, would be to catch the fund “red handed”.
I agree. The distinction between political and economic investing is a difficult one to make. For example, public pension funds have been struggling with this issue for decades. On the one hand, there is a desire to use pension capital to revitalize local economies. On the other hand, doing so without proper governance practices could result in a lower return, which would be a breach of fiduciary duty. In short, if we are still evaluating public pension fund governance with respect to politically sensitive investments, SWFs present a much more difficult case to evaluate for the simple reason of transparency and accountability. This is perhaps why so many people look to the more general SWF governance practices as important. By looking at the institution as a whole (and how it operates), implications can be drawn about specific investments.
In this regard, the China Investment Corporation (CIC) may be facing some difficulties ahead: Dr. Truman suggested that the CIC, as an institution as a whole, is highly politicized and thus facing some “big problems”. We’ll soon find out…