“It is an ill wind that blows nobody any good”

Ashby Monk

I lifted the quote above from Jin Liqun’s op-ed in the China Daily today. Jin is Chairman of the CIC’s Supervisory Board and Deputy Chairman of the International Forum of Sovereign Wealth Funds, and he seems to be suggesting—if I’m interpreting him correctly—that SWFs may soon be facing some new protectionist headwinds:

“…misgivings about SWFs are likely to rekindle as economies recover and the credit crunch becomes less of a problem. The mood would probably swing back. It may sound a bit weird, but it is true that SWFs’ relevance to global stability does not guarantee their status as a guest of honor in some of the economies where they have proved to be part of the solution, not part of the problem.”

Many SWF analysts and wonks have been wondering when these sentiments would resurface in the wake of the crisis. Jin’s op-ed may be a signal that protectionism is on its way.

What I found interesting about Jin’s article was his take on why the CIC has, in particular, raised concern in the West:

“Two issues seem to have ruffled feathers in the mature economies in the West. One is state ownership and the other is size. Indeed, these two issues are quite irrelevant. By definition, any SWF is state-owned. While the sovereign feature is its glaring hallmark, management is independent of ownership. SWFs have made it very clear that they have no political agendas to pursue, their mandate being to achieve satisfactory returns on their investment in the long term.”

Jin is right; these two factors do underpin much of the West’s concern about the CIC. However, I’m not sure I would discount the relevance of state ownership, as Jin does; indeed, he says that state ownership is irrelevant because the CIC’s management is independent of ownership. While he is technically correct in terms of the organization’s theoretical design, many remain unconvinced that this design accords, in practice, with true independence.

To be sure, the CIC is set up in a manner consistent with Western corporate structures. For example, there is a CEO that is responsible to a Board of Directors. There is also a Board of Supervisors with an audit committee and a supervision committee. In short, the organization appears to meet Anglo-American expectations for corporate governance.

However, as Gordon and I argued in a recent paper, the central government still manages to directly and indirectly influence CIC decision-making. We suggest that the central government is able to exert control over the CIC by virtue of the Party’s claim on the career prospects of the senior officials running the CIC (see here for more details). So, the CIC’s commitment to a Western institutional form may not represent a functional allocation of powers and responsibilities consistent with the practice in many Western investment agencies.

In other words, the CIC’s managers may not be as independent from the owners as Jin claims…but it’s next to impossible to know for sure, which is why protectionism remains a threat.

2 Responses to ““It is an ill wind that blows nobody any good””

  1. 1 Rien Huizer June 10, 2010 at 6:30 am

    Maybe Mr Jin refers to an idealized version of SWF, or he is simply doing his work as a senior financial diplomat by ignoring a few aspects of eg CIC that differ from his ideal, or he is implying that China should deal with the SWF phenomenon more in line with the ideal. No one knows. Curious that this comment appears more or less simultaneous with another sign that CIC’s mandate and funding are still not settled.

  1. 1 Congress Eyeing the CIC « Oxford SWF Project Trackback on October 12, 2010 at 11:13 am

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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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