Q&A with Zheng Bingwen, Senior Research Fellow at the Chinese Academy of Social Sciences

Ashby Monk

The Oxford SWF project is a source of open discussion and engagement on the topic of SWFs. As such, we welcome and indeed seek out all views and opinions on the subject. Today, we offer the tenth instalment of our segment: “Q&A with a SWF expert, stakeholder or policymaker”. We are pleased to welcome Zheng Bingwen of the Chinese Academy of Social Sciences. While Dr. Zheng’s views are his own, his perspective helps to further debate and facilitate understanding.

Ashby Monk: Thanks for joining us today, Bingwen. You recently argued that the China Investment Corporation has sparked a “new round of the China investment threat theory”. Why? What is it about the CIC that makes some foreign governments uncomfortable?

Zheng Bingwen: When the CIC was set up at the end of 2007, many governments and international organizations expressed their concerns and suspicion. For instance, the U.S.-China Economic and Security Review Commission held a hearing on February 7, 2008 entitled: “The Implications of Sovereign Wealth Fund Investments for National Security”. Over dozens of invited speakers expressed suspicions about the CIC. I interpreted the testimony to suggest that SWFs from small city states that are allied with the United States are likely to generate fewer concerns than funds from countries with aspirations to be global or regional powers (such as China). While this is only one example of suspicion, it was apparent during the testimony.

Ashby Monk: You were recently quoted as saying that SWFs breed suspicion because they are unregulated. Can you explain what you meant by this?

Zheng Bingwen: Some months ago I was interviewed by Reuters on this topic. As I said then, SWFs cause concerns not simply because they are unregulated but because they are less transparent than Sovereign Pension Funds (SPF). Moreover, their risk tolerance is much higher. It is this combination that is causing problems. I did note then (and still believe) that the supervision and regulations for SWFs are not as mature and traditional as for pension funds. So, many people are afraid that SWFs could come to Wall Street seeking mergers and acquisitions for unknown reasons. In the West, pensions have been around for almost a hundred years, so Westerns are quite used to them. In their view SPFs are angels, but SWFs are the opposite.

Ashby Monk: Given the above, you suggest that one way to overcome foreign concerns over the CIC is to launch a new fund-a sovereign pension fund-that will deflect foreign criticism. You argued that Norway’s Government Pension Fund would be the appropriate model. What are you suggesting here? Also, the implication is that the CIC is quite different from Norway’s fund. How are they different?

Zheng Bingwen: CIC is CIC. It should not copy Norway’s fund, but should maintain itself as it is now. Rather, the increasing size of China’s foreign exchange reserves suggests to me that it should be split into several investment funds, such as a SWF and (I hope) a SPF. By the end of last September forex reserves touched $1.91 trillion. Moreover, forex reserves are anticipated to surpass $2 trillion by the beginning of the coming year. So, pressure for reserves will come down and there is scope to create new funds.

Ashby Monk: What has been the response in China to your proposed sovereign pension fund?

Zheng Bingwen: Some people are interested in it. Many people read my paper on the subject in the Journal of International Review [Chinese version]. However, I am simply a researcher. This is my own view, and I do not concern myself with the views of policymakers on my proposal.

Ashby Monk: As a final question, I’m curious to hear what you see as the biggest weakness of the CIC? How should this be addressed?

Zheng Bingwen: I was interviewed by Shanghai Securities News on 2 September 2008 on this issue. The CIC’s biggest weakness is that it is confronting considerable pressure to achieve high rates of return. Because the government bonds used to finance the CIC get more than 5% per year-not to mention the expectation of an RMB revaluation-the CIC is likely facing a hurdle rate of nearly 10% per year. This requirement and the pressure to achieve high returns is the CIC’s biggest weakness.

If China follows my advice and sets up a SPF, a trust investment-style should be taken in order to lower the pressure of returns for the Fund. (The ‘trust investment-style’ means that the central bank would outsource investment management of foreign reserves.) Otherwise there is a possibility that high return strategies could result in higher, unnecessary risks. This, in turn, could raise concerns abroad about a ‘China-threat’.

Ashby Monk: Thanks, Bingwen, for taking time out of your busy schedule to chat with us today. We really appreciate getting the Chinese perspective on these issues.

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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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