China Goes Out

Ashby Monk

Jamil Anderlini has an interesting article out in the FT on China’s deployment of its foreign exchange reserves. The article cites China’s Premier, Wen Jiabao, as saying that the investment of China’s reserves should take into consideration the foreign objective of China’s firms:

“We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises.”

In short, Wen wants the country’s reserve investment vehicles to consider China’s global objectives when making investments. As Brad Setser noted yesterday,

“…China looks set to use SAFE’s huge pool of foreign assets to support Chinese firms’ outward investment.”

I’m rather surprised to see this type of rhetoric coming from Chinese elites, as it seems to suggest, officially, that SAFE and the CIC will expand its list of criteria used to make investment decisions (assuming it has not already done so) from ‘what might make higher returns’ to ‘what might make China better off’.

To date, the CIC has argued that it was simply interested in the former, as the latter would be perceived in the west as ‘politicized investing’. And based on western governance models, I would have to agree that investing for the generic benefit of China’s firms is not a purely commercial investment strategy. So I’m having trouble understanding why Wen made the statement. Back to Setser:

“China’s announcement presumably was directed at a domestic audience – one that is increasingly uncomfortable with China’s growing exposure to the dollar, and one that wants China to use its foreign assets in ways that more obviously help China’s own citizens.”

In other words, domestic legitimacy of its foreign reserve investment policies could be strengthened by tying the investment of China’s reserves to a much larger national plan; ‘going out’ as an internal political tool. Interesting.

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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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