SWFs and Energy Security

Ashby Monk

The “Generally Accepted Principles and Practices” for SWFs are quite clear in their description of appropriate SWF investment behaviors; they say that SWFs should maximize risk-adjusted financial returns based on economic and financial grounds. Specifically, they say SWFs should…

“…pursue investment decisions and investment operations free of political influence…” and “…publication of the GAPP should help improve understanding of SWFs as economically and financially oriented entities in both the home and recipient countries.”

You all know this story. And, you probably also know that it was Western fears about politically motivated SWF investments that drove the international community to (attempt to) de-politicize what is inherently a political and governmental entity (i.e., to make SWFs something they are not). Fair enough. It was that or face protectionism.

But setting the bar for de-politicization this high actually raises a pretty big question for resource-poor countries with large and growing stockpiles of foreign exchange reserves (i.e., Asian countries): should governments ignore the intent of the GAPP and use their SWFs to further national welfare and bolster energy security? Or should they stick to the GAPP and focus only on financial objectives? Not surprisingly, some countries are thinking about doing both.

Over the past year, India and Japan have talked candidly about using a SWF to advance strategic national interests in the energy space. In addition, the CIO of Korea’s SWF has made reference to his fund’s strategic objectives:

“KIC is planning strategic investments based on a so-called barbel approach, investing in areas where there’s a ‘structural deficit’ in Korea’s economy such as natural resources, as well as industries that may have synergies in areas such as clean technology.”

And, yesterday, we learned that the China Investment Corporation is increasing its presence in Canada to bolster its investments in natural resources, in particular in Alberta. Moreover, I just came across an interesting paper by You Miao and Han Liyan of Beijing’s Beihang University entitled, “Sovereign Wealth Funds in China: The Perspective of National Energy Strategy.”  The authors argue that a strategically oriented SWF can dramatically increase national welfare. Now, that’s pretty interesting, but, for me, the most interesting thing about this paper is to see the Chinese government funding research that attempts to quantify and legitimate strategically oriented SWF investments. Now that’s interesting.

So, what does all this mean? It means that, despite what the GAPP says, some SWFs may in fact be investing for the benefit of the nation state as well as for the benefit of the fund. Should we be surprised by this? Probably not. After all, even the US government has allocated considerable resources to the issue of energy security, building the strategic petroleum reserve (which is the single largest emergency supply of oil in the world and is valued at over $100 billion).

What will the reaction be in investment receiving countries? Apparently, in some quarters, this isn’t news at all. In fact, Alberta’s Energy Minister is well aware of the potentially strategic motivations of the Chinese SWF’s investments in his domain. He said yesterday,

“You’ll continue to see them strategically invest in minority stakes in companies in order to have some skin in the game…to learn and, in their mind, provide them with some long-term security.”

Interestingly, a strategic SWF in his backyard doesn’t seem to bother him. Why not? As I said back in January, these strategic investments may serve the interests of the target country more than the investing country. After all, a politically motivated SWF will ascribe a higher value to an investment than it might otherwise do if it was using only cash flows for the valuation. It will be interesting to see how other policymakers and indeed countries react if SWFs continue to follow more strategic paths.

4 Responses to “SWFs and Energy Security”


  1. 1 Sven Behrendt May 19, 2011 at 12:52 am

    However, Ashby, GAPP 19.1 Subprinciple says: “If investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.” So we should probably not cry foul if SWFs do indeed pursue strategic investments that meet broader national interests per se.
    We should, however, be concerned if investment behavior is not in line with the declared policy purpose (GAPP 2.). I would not be surprised if the CIC, for example, did pursue investment policies that meet China’s energy demand and thus serve broader national economic interests. Fair enough. However, CIC’s declared mission is to pursue “diligently long-term investments that maximize our returns.”
    Your entry, Ashby, suggests that CIC’s declared objectives (maximize returns) do not correspond with its behavior (serve national economic development interests). And that is not in line with the Principles. What CIC should therefore do (if it was indeed mandated with these broader objectives) to meet the standards set by the Principles, is either forgo strategic investments (which I guess is not in their interest) or to transparently communicate its mandate, including reference to national economic interests (if this is indeed the case). Then host countries can adjust their policies accordingly. To declare something and do something else will necessarily nurture public speculation about what SWFs “are really all about”, with all sorts of messy policy consequences.

    • 2 Ashby Monk May 19, 2011 at 11:25 am

      I guess my point was to say that I didn’t think these funds were following 19.1. If you have a look through KIC’s annual report, I defy you to find me where it says “commodities” as a focus. This only comes out in conversations with reporters. Anyway, thanks for your comments!

  2. 3 MMcC May 19, 2011 at 8:36 am

    Ashby, when you wrote “the most interesting thing about this paper is to see the Chinese government funding research that attempts to quantify and legitimate strategically oriented SWF investments,” I’m not entirely sure you had the horse and the cart in the right order. Beihang is a relatively new university and the economics and management faculties, without any disrespect, publish a truly mind-boggling number of papers that tend to emphasize the word “international.” It might be difficult to find any area of international policy about which a Beihang research paper, policy suggestion or commentary has not been produced. As a consequence, I’d tend to believe that SWF investment policy is, at Beihang, an area that attracted reseachers who already had government funding to spend. I don’t mean this as a cheap shot at Beihang, but I’d be surprised if anyone with a hand in Chinese SWF policy formation was aware of this paper’s existence until publication, much less had a role in its instigation. Even in Chinese academia, there are at least as many mills as there is grist and, to mix metaphors, some mills are more equal than others.

    • 4 Ashby Monk May 19, 2011 at 11:25 am

      That’s really useful, Mike. Thanks. I take your point. Linking State Council –> NNSF –> Beihang –> Academics may be a bit of stretch! Cheers, A


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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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