It’s SAFE to Pursue Politics…

By Ashby Monk

In an article for the National Interest, Daniel Drezner made an interesting observation about one of China’s SWFs, the State Administration of Foreign Exchange (SAFE):

“Lost amid the financial chaos of the past six weeks was the revelation that China’s State Administration of Foreign Exchange used a $300 million purchase of government bonds and a $150 million grant to Costa Rica in return for that country’s decision to sever diplomatic ties with Taiwan after sixty-three years and recognize the People’s Republic of China.”

Drezner is right. This investment by SAFE received limited press considering its implications. Based on my conversations with U.S. policymakers over the summer, it seems to be exactly the type of SWF behavior that raises concerns. Here we have a foreign SWF using its financial capital to achieve political ends. As Jamil Anderlini of the Financial Times noted in September:

“The purchase of US-denominated Costa Rican government bonds by China’s State Administration of Foreign Exchange (Safe) is the clearest proof yet that Beijing regards its $1,800bn in foreign reserves – the world’s biggest – as a tool to advance its foreign policy goals, as well as a potential source of income.”

In order to better understand this specific case, I asked Dr. Yu-Wei Hu of the OECD what he thought–he’s an expert on Chinese pension funds and has been tracking the SWF debate in China for some time. Here is what he had to say:

“In fact, it is to some extent consistent with what is noted in my Q&A, i.e. the SAFE is a governmental department, therefore it should not be surprising to hear that the Chinese government uses it to achieve its national objectives. However, due to different status (and different stated objectives) it is unlikely that the NSSF and the CIC would be involved in any transactions like the cross-strait and/or diplomatic relationship (at least in the near term). It is too dangerous and unnecessary for them to do so, and if the Chinese government really wants to, they can always find alternative ways, e.g. via SAFE.”

Yu-Wei’s views and insights into the institutional differences among these funds are helpful. If I understand him correctly, SAFE can invest (…as it apparently just did…) to acheive political ends. However, because SAFE is able to pursue politics, it gives the CIC and the NSSF some space to behave in accordance with Western norms.

This raises a couple of questions: Will countries like the U.S. differentiate among China’s funds or will it use SAFE’s recent investment as a reason to make general rules about Chinese investment funds? Also, will SAFE look to adopt the Santiago Principles? To what extent will SAFE continue acting in this manner? With respect to the final question, Yu-Wei had one final point of interest here:

“An interesting note. It has been recently reported on an overseas Chinese website that officials of mainland China and those in Taiwan are discussing the possibility of stopping the ‘Money Diplomacy’ strategy from both sides, since some small countries have been taking advantage of it…

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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