Is The CIC Motivated By Profits And Politics?

Ashby Monk

According to Katrin Bennhood of the New York Times, over 50 Chinese officials and executives — including the President of the China Investment Corporation, Gao Xiqing — are descending on Davos this week to rub shoulders and, in effect, “go shopping” for new investment opportunities. It seems China’s state investment vehicles are set for another busy year.

As if on cue,  Bloomberg reported this morning that the CIC is considering a new round of resource related investments. I find this remarkable, as the CIC already invested $10 billion in the sector in the last six months alone! You’d think the fund’s unblinking focus on resources would raise suspicions of politically motivated investing at some point.

It has; this suspicion was voiced by Larry Catá Backer in a (fascinating) blog post over the weekend:

“A review of [the CIC’s] activities during the last six months suggests the way in which state policy, political objectives for economic activity can be harmoniously mixed with profit maximization to deepen a new form of investing that is neither entirely private (as conventionally understood) or wholly public… The Chinese sovereign wealth fund moves over the course of the last six months suggests not merely power within global private markets, but also the mechanics of an operation that are neither entirely public nor private.”

To date, however, the fund has avoided such concerns by using inflation as its justification for this wave of resource investments; as Gordon and I argued in our recent article in Foreign Policy:

“…due to expansionary monetary policies in the West, the CIC has been able to invest in resource and commodity firms without drawing geopolitical attention. Indeed, inflation is now the major concern among institutional investors, and real assets offer a good hedge; the CIC has clearly been taking advantage of this. In a sense, the recession provided the CIC with cover to invest in a way that met both the fund’s commercial needs and China’s strategic goals.”

So, is the CIC motivated by both profit and politics? It’s very difficult to tell, but there is a growing awareness of this possibility. As Backer says, this may “require close scrutiny as it develops over the next half decade.”

3 Responses to “Is The CIC Motivated By Profits And Politics?”

  1. 1 rien huizer January 30, 2010 at 1:18 pm

    Larry CB is on to something, and it is profoundly disturbing. Illiberal economic policies such as China’s may be permissible within a state’s borders but used internationally, they violate important principles of the relatively peaceful, predominantly liberal order (and maybe even WTO in a technical sense) that has contributed to world peace during the past 64 years, with an enormous increase in world consumption per capita, despite the equally enormous growth in population. Large states should not adopt policies that reflect a zero sum view of the international economy.Older people that most readers have seen this all before, but then, the Chinese were too busy fighting each other and neighbouring barbarians. Read also the co-referenced paper by Chen and Ping that LCB refers to. CIC appears there in a provocatively nationalist way..

    • 2 MMcC February 1, 2010 at 1:10 am

      Again, I’d be more convinced by this reasoning if every other Chinese investor – personal, QDII fund, insurer, what have you – wasn’t also chasing resources as a long-term bet. There’s a potential informational advantage to being in China: you can see just how much infrastructure is going to be needed. The domestic answer to how much tends to be orders of magnitude larger than the offshore answer. As a result, domestic investors, of whatever stripe, all think resources are currently cheap and a great long-term buy, especially when you factor in the increased buying capacity of a China with a presumably revalued Rmb. When CIC is zigging while every other investor zags, then I’ll start looking for a hidden (non-profit or state-directed) motivation. Until then, it looks to me too much like data selection that ignores context.

  2. 3 Ashby Monk February 1, 2010 at 3:00 pm

    Interesting point, Mike. I think your view fits into my original argument: that this is a savvy commercial play that also happens to fit into the broader national agenda. Cheers.

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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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