China’s SWFs Tournament: To the Victor Goes the Reserves

Ashby Monk

I had a little fun at the CIC’s expense last week when I wrote a (tongue in cheek) “SWF soap opera” that detailed some of the difficulties that this SWF has faced since its launch in 2007. I should mention, however, that the CIC actually came off looking quite good in my “story”. Instead, it was the fund’s masters that appeared to be playing games.

Well, it turns out that my “fictional interpretation” actually wasn’t all that far from the truth (…which was kinda the point, but anyway…): I just read a new paper entitled “A principal-agent analysis of China’s sovereign wealth system: Byzantine by design” by Sarah Eaton and Zhang Ming that indicates the CIC is in fact embroiled in some hard nose “bureaucratic politics” and that these “games” serve an important purpose. The authors also offer some insight into why the much talked about capital injection has not yet occurred.

The paper offers remarkable detail into the political turf wars that the CIC has been up against right from the beginning. And, even more interesting, the authors suggest that this is all part of a grand plan to force the CIC into an intra-state competition. Why? The State Council wants to ensure that the CIC is doing what it wants it to. Which means that the winner of the competition (i.e. the fund that demonstrates an ability to generate returns) will receive more (much more) reserves to manage.

The authors are calling this a “SWF tournament”, which includes China’s CIC, SAFENSSF and even potentially the CDB/CADF. Here are some excerpts from the paper:

“China’s leadership has since endorsed this rivalry because it has supplied the government with valuable carrot and stick mechanisms with which to discipline fund managers.”

“If CIC’s performance is found to be poorer than SAFE’s, and especially if CIC’s returns cannot match those of the conservatively-oriented NSSF, the management team of CIC will certainly receive heavy criticism from the upper reaches of government not to mention the media. Whether or not CIC will receive further capital injections will be decided by what CIC is able to achieve in the next couple of years.”

“The relative performance of these funds will also be key considerations in the central government’s decisions about the political futures of the official-managers at the helm of these SWFs. These are the two primary prizes in China’s SWF tournament.”

Well, that’s one way for the principals to discipline the agents! And it also calls into question the “independence” of this entity from the State Council (for those of you that bought into that rhetoric). Anyway, it’s a nice read for the weekend. Enjoy!

3 Responses to “China’s SWFs Tournament: To the Victor Goes the Reserves”


  1. 1 Rien Huizer September 18, 2010 at 12:48 am

    Unfortunately the paper itself is not freely available but the approach suggests a cohesive, rational and well-informed principal role. Many China experts would find that a pretty big leap..

  2. 2 Gabi October 21, 2010 at 12:06 pm

    I just read the above mentioned paper, and its argument is quite unique. Well done to the authors!


  1. 1 The CIC Funding Saga Continues « Oxford SWF Project Trackback on January 17, 2011 at 9:16 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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