Abstract:
At the 19th National Convention of the Communist Party of China, Chinese president Xi Jinping espoused the emergence of a new era, a new era in which China is no longer a passive bystander troubled merely by its own socio-economic development, but an era in which China is one of the main actors taking full charge in the construction of this new era. Looking at China’s leading sovereign wealth funds, the research paper investigates whether China is showcasing tendencies of a rule-taker, rule-maker or a rule-breaker when it comes to China’s deployment of state capital? The comparative analysis in the research project reaches the conclusion that China that used to be the rule-taker, a policy necessitated by its needs to grow and stabilize itself socio-economically at the time, is now not only a rule-maker but also a rule-breaker when it comes to the sovereign wealth funds industry.
Keywords: sovereign wealth funds, China, political economy, revisionist states, public finance
Introduction
At the 19th National Convention of the Communist Party of China, Chinese president Xi Jinping described his vision of a new era for China with the following words: “It will be an era for the Chinese people of all ethnic groups to work together and work hard to create a better life for themselves and ultimately achieve common prosperity for everyone. It will be an era that sees China moving closer to center stage and making greater contributions to mankind.” (9). Later in his speech, President Xi added that even though China does not pose any threats to any states in this “new era”, “no one should expect … [China] to swallow anything that undermines … [China’s] interests” (53). President Xi’s three-hour long address left many Western media outlets observing a twofold shift in his narrative, (1) shifting out of the narrative of China as a poor state trying to build itself up from its ashes into the narrative of a strong global player taking part in the making of a “new era”, and (2) shifting out of the narrative of a leader who is trying to uphold the previously developed visions of previous leaders, into the narrative of introducing a “new era,” ideated and proposed by Xi Jinping himself, like Mao Zedong and Deng Xiaoping had done under their leadership (Buckley and Keith 2017, Phillips 2017).
Outside of this grand vision, President Xi’s speech also outlined specific economic policy and development goals, such as “… [to] deepen reform of the investment and financing systems, and enable investment to play a crucial role in improving the supply structure” (30) and to develop “… new ways of making outbound investments, … form globally-oriented networks of trade, investment and financing, production, and services, and build up our strengths for international economic cooperation and competition” (31). The special focus that international trade and investment received in his remarks was seen as in line with a changing China, a China that is globally-oriented and develops and implements its own policy objectives internationally. While China’s sovereign wealth funds did not receive a specific mention at President Xi’s address, his mention of the “globally-oriented networks of trade, investment and financing” as well as “reform of the investment and financing systems” alluded to these recently established extensions of the Chinese government. Sovereign wealth funds are state-owned investment vehicles that invest globally on behalf of the state that they are operated by. Their purposes range from stabilizing governments to accumulating savings for future generations, from managing the foreign reserves to offsetting the future lack of valuable natural resources such as oil or gold. With more than a hundred active sovereign wealth funds worldwide, more and more investment professionals call for the establishment of a more robust international regulatory framework with the purpose of streamlining investment decisions of sovereign wealth funds. Currently, world’s largest ten sovereign wealth funds include three Chinese funds, namely the China Investment Corporation (~$813.8 billion) at number three, the State Administration of Foreign Exchange [SAFE Investment Company] (~$441 billion) at number seven, and the National Social Security Fund (~$295 billion) at number ten. While most states have one sovereign wealth fund, China currently has more than four, each of which serves a different purpose and acts independently from the other ones.
As seen from President Xi’s address, China is espousing the emergence of a new era, a new era in which China is no longer a passive bystander troubled merely by its own socio-economic development but an era in which China is one of the main actors taking full charge in the construction of this new era. Borrowing the terminology first introduced by Hamel (Hamel 1996), Xi Jinping’s address reinstates the notion that China is not merely a rule-taker anymore, but is transforming itself to become a rule-maker instead. I argue, in this paper, that the state-sponsored development and the diversified utilization of sovereign wealth funds as national investment vehicles is just another step in the Chinese economic statecraft, a statecraft that ultimately aims to stabilize governmental investment and obligations while responsibly managing foreign reserves. However, to what extent the Chinese sovereign wealth funds are a part of China’s transformation from being a rule-taker to a rule-maker is a question that is still yet to be answered within the relevant branches of academic literature. In this research paper, I try to solve the puzzle around how the Chinese sovereign wealth funds fit into China’s construction of this “new era,” and the consequential transition from being a rule-taker to a rule-maker. In that spirit, I ask the following research question: is China showcasing tendencies of a rule-taker, rule-maker or a rule-breaker when it comes to China’s deployment of state capital through its sovereign wealth funds? What does the Chinese sovereign wealth funds tell us in terms of China’s self-espoused transformation from a rule-taker to a rule-maker? This mostly descriptive analysis is trying to recognize common and divergent patterns across Chinese sovereign wealth funds to see whether the current policies and practices are best described as conforming to the definition of a rule-taker, a rule-maker, or a rule-breaker. My interest is ultimately to get to the core of whether China is a challenger to a rules-based order through its sovereign wealth fund industry, and if that is the case why there may or may not be a variation in regards to its approach to its sovereign wealth funds.
To sufficiently respond to the questions posed, I first present a concise literature review on sovereign wealth funds, Chinese political economy, the rule-maker/rule-breaker/rule-taker framework. A multitude of competing theoretical approaches to classifying states like China regarding their deployment of state capital through sovereign wealth funds are explicated and contrasted. Through reviewing the sources of existing secondary literature, my contribution to the existing literature is positioned appropriately. Following the literature review, I define the concepts of a “rule-maker,” “rule-taker,” and “rule-breaker,” along with an explanation of the rules themselves, in this case the Santiago Principles that are meant to be guidelines that sovereign wealth funds voluntarily choose to follow. Lastly, the three aforementioned major sovereign wealth funds are investigated in more detail in terms of their purpose of establishment, investment practices, and investment returns, and how they are aligned with the international rules and legislation regarding sovereign wealth funds, namely the Santiago Principles. Annual reports of the China Investment Corporation (CIC), the State Administration of Foreign Exchange (SAFE), and the National Social Security Funds (NSSF) from the years of 2015 and 2016, are investigated to gather evidence around the ways in which these three Chinese sovereign wealth funds may be using their investments in line or outside of the Santiago Principles. The investigation is concluded through reinstating that the evidence that has been analyzed in the previous chapter shows that China is predominantly a “rule-maker” with occasional tendencies of a “rule-breaker” when it comes to its sovereign wealth funds. The systematic analysis throughout the paper will be overlaid with statements from Chinese state-employees in terms of what they see the role of sovereign wealth funds to be in the evolution of modern China. .
It is my hope that the qualitative analysis of primary sources interwoven with international relations literature will ensure the inclusion of metrics, which are hard to quantify, and produce a significant contribution to the literature on sovereign wealth funds, and Chinese political economy at a unique cross point that unfortunately has been repeatedly neglected in the present literature.
Literature Review
Alhasel’s (2005) literature review of sovereign wealth funds conclude that the main investment interests of sovereign wealth funds are economic rather than political. Included in that literature review is Balding’s (2008) investigation of whether the accusations that sovereign wealth funds are foreign investment tools that destabilize certain markets, harm certain governments, and politically disrupt weaker economies hold true. He concludes his investigation through stating that for the time being there is not enough evidence to support such a claim that sovereign wealth funds are purposefully trying to distort financial markets. He argues that sovereign wealth funds do not yet have enough weight in the market to make massive impacts that are truly observable, and that they seem to be acting as rational economic agents according to the present investment summaries and financial data points.
In his Harvard Business Review article, Hamel (1996) first introduces the rule-taker, rule-maker, and rule-breaker differentiation, intended to describe the roles corporations play in competitive markets. Hamel argues that institutions constantly transition between these three categories; when they start off as being merely rule-takers, they may transition to break those rules when they find an opportunity to do so, followed by actually starting to establish their own rules. Wang (2017) argues that China as a rising power is no longer a rule-taker; it is somewhere between a rule-maker and a rule-breaker, as it supplies incremental reforms to international institutions. His argument is positioned as an explanation of increased Chinese influence over international political and economic institutions, but does not particularly focus on sovereign wealth funds.
Similar to the rule-maker/rule-taker/rule-breaker framework in business literature, international relations literature includes Organski’s (1958) power transition theory, in which he distinguishes between revisionist states and status quo states. According Organski’s analysis, a revisionist state is one that is dissatisfied with its status quo in the present international system, and is working hard to advocate for revisioning that status quo. Status quo states in the meantime are the powerful and influential nations who have significantly benefited from the emergence of western liberalism at a large scale, and view the current international law and free market economics as integral parts of the international order that must be upheld. Following Organski’s categorization, Chin (2017) argues China is a revisionist state when it comes to its approach to money in the global financial system. He examines the specifics of China’s call for a global systemic reform to establish an “actual multi-centered and diverse monetary system” (36), and argues that while China’s first response into its integration to the global financial infrastructure was to abide by the established system to comprehend its intricacies and established hierarchies, a later response involved actively pushing for the revision of these established hierarchies to bring RMB as close as possible to the status quo of USD in the global stage.
Kastner, Pearson, and Rector (2016) used a similar framework to Hamel and Organski, this time to describe China’s approach to international governance institutions. Under the framework of invest/hold-up/accept, they question the conditions under which China chooses to build its own international governance institutions and actively lobby many nation-states to join them in these creations (investing), chooses to accept international governance institutions’ already established regulations and participate in them (accepting), or chooses to complicate the workings of currently established international governance institutions by attempting to leverage its influence to actively reorder existing arrangements (holding-up). Chow (2017) exemplifies my instances of China choosing to hold up with the purpose of accelerating its own rise as a global economic power. He emphasizes the policies that undermine the competitiveness of foreign-owned multinational companies operating within China. The undermining of the foreign-owned multinational companies at homes goes hand-in-hand with another hold-up strategy of giving China’s own state-owned enterprises an advantage when they choose to expand their investments abroad, particularly in the developing world (Goldstein, 2017).
Outside of theoretical frameworks, Norris (2016), in his investigation of Chinese political economy, focuses on China’s sovereign wealth funds. He argues that Chinese sovereign wealth funds pose strategic concerns for countries like the United States, where the Chinese investment goals are implemented. In line with Chow’s observations about China’s “hold-up” strategy at limiting the competitiveness of investment at home, Norris argues that China’s investments in the United States exploit the absence of robust regulation which typically forbids foreign states from asserting too much influence in domestic affairs through the governance of certain key corporations. Liew and He (2010), on the other hand, extend an argument about how the institution of Chinese sovereign wealth funds were aimed at instituting a “harmonious society” through economic empowerment and independence. They argue that the creation of the CIC, China’s largest sovereign wealth fund is a direct result of the power struggle between the People’s Bank of China and the Ministry of Finance in asserting more influence over macroeconomic policy and fiscal affairs. They mention that Chinese officials do recognize that China’s sovereign wealth funds could easily end up as an instrument for domestic industry support when needed as well as an instrument for investing state savings in productive domestic and overseas endeavors (36). Therefore, both investigations of Norris, and Liew and He argue that Chinese sovereign wealth funds are not merely following internationally determined implicit norms but are utilized to further Chinese strategic interests at home and abroad when needed.
Having paraphrased a significant portion of the research that investigates the Chinese sovereign wealth funds, it is clear that my research intervenes within the current literature through combining the literature around China being a rule-taker, rule-maker, or a rule-breaker along with the literature around sovereign wealth funds. The rule-taker/maker/breaker framework has not been used to analyze sovereign wealth funds in academic publications at this point in time, so I utilize the rule-breaker/maker/taker framework to (1) highlight that there are written rules around sovereign wealth fund management that China may explicitly abide by. However, there also exists an alternative set of ambitions, not in line with these written regulations, that China pursues, and (2) that the Chinese sovereign wealth funds are able to explain a portion of China’s transformation from being merely a rule-taker to being somewhere in between a rule-maker and a rule-breaker. It is the conviction of this research project that the rule-maker/taker/breaker framework is able to add a new dimension to the existing literature around sovereign wealth funds. Also, it is implied that a robust discussion of sovereign wealth funds as a case study of rule-maker/taker/breaker literature surrounding Chinese political economy is able to strengthen the claims of China’s transformation as espoused by Xi Jinping’s speech in the 19th National Convention of the Communist Party of China. China is, now, somewhere in between a rule-maker and a rule-breaker, and its sovereign wealth funds are no different in that respect.
Rule-Taker/Maker/Breaker Framework
Before pursuing a fully-fledged analysis of how Chinese sovereign wealth funds contribute to China’s economic transition on the world stage, I will first discuss why I chose the rule-taker/maker/breaker framework over other similar frameworks developed by different scholars. Then, I will move on to explain what rule-taker, rule-maker, and rule-breaker specifically means, and what evidence from the sovereign wealth funds front would constitute evidence that a particular country is acting in accordance with the definition of one of these categories.
The reasons behind why I chose to construct this investigation using the rule-taker/maker/breaker framework are threefold. First and foremost, when compared to the invest/hold-up/accept or the revisionist/status quo frameworks, the rule-taker/maker/breaker is the most business-appropriate. Considering that sovereign wealth funds are more similar to independent business and mutual funds in nature than sovereign states in their role and function, this framework seems to be the most applicable. Secondly, rule-taker/maker/breaker framework allows for a rather effortless transition between different categories, it is not merely an action that a state takes, but a rather fluid state that the institution finds itself at. Thirdly, unlike the other two theoretical approaches, the rule-taker/maker/breaker framework reaches a normative conclusion that “strategy must be revolution” (82), advocating the most ideal strategic position for a company to be at as the spot between a rule-maker and a rule-breaker. This normative conclusion seems to be more in line with China’s ideal way to be, its own ideated normative conclusion.
For the purposes of this investigation, we follow Hamel’s descriptions of the three categories. Therefore, a rule-maker would be defined as an incumbent that built the industry in the first place, a rule-maker is the creator and protector of the industrial orthodoxy, a part of the established oligarchy (69). A rule-taker is an institution that follows the paths that have been charted by these incumbents that built the industry in the first place; a rule-taker pays homage to the incumbents. A rule-taker does not challenge the status quo in any way besides inserting itself into the status quo, following the incumbent’s strategy, and through hard work and diligence attempting to outpower it (70). The last category, a rule-breaker, is an institution that is set on overturning the pre-established order. It does not merely want to carve a space for itself, but wants to overturn the entire space so that it can carve a larger space, while the incumbents get to cover smaller ones. The rule-breakers are the revolutionaries, the radicals, and the malcontents (70). It is important to note at this point that the definitions outlined above differ significantly from Wang’s (2017) definition of what a rule-maker and a rule-taker means in his investigation of China. According to the set of definitions that he employs, a rule-maker promotes global reforms of existing arrangements, while a rule-breaker creates its own arrangements.
Therefore, in this investigation, the evidence of sovereign wealth funds would be contrasted against the backdrop of the definitions of rule-maker, rule-breaker, and a rule-taker originally provided by Hamel. If a Chinese sovereign wealth fund has been among the ones who have established the current status quo, that fund would be a rule-maker, if the fund has been accepting the status quo without having had a contribution in its generation, the fund would be a rule-taker, and if the fund has been constantly attempting to overturn the pre-established order through deviating from the previously agreed practices and regulations, the fund would be a rule-breaker. Considering that the fund is state-owned, and is closely aligned to the interests and needs of the Chinese state, the categorization of the sovereign wealth fund would provide evidence about the potential categorization of the Chinese state itself.
Generally Accepted Principles and Practices – “The Santiago Principles”
Upon establishing the definition of a rule-taker, a rule-maker, and a rule-breaker, it is important to now define the “rule” that the agent makes, takes or brakes. In other words, what is the rule that this investigation is testing China’s act of taking, making or breaking against? Considering that the emergence of sovereign wealth funds is a relatively recent phenomenon, even when considered under the scope of the short history of modern finance, there really is not a multitude of competing organizations or alliances on the ground. However, there exists a single membership-based organization that some sovereign wealth funds choose to take part in, the International Forum on Sovereign Wealth Funds (IFSWF). Boasting more than thirty current members, IFSWF was founded out of an IMF working group in 2009 with the intention of establishing a voluntary organization whose members are committed to working together and strengthening the community through dialogue. The forum provides a set of guidelines that all members have voluntarily endorsed, known as the Generally Accepted Principles and Practices (GAPP) or “the Santiago Principles,” which are aimed at providing guidance on accountability arrangements, the appropriate conduct of investment practices, and the conditions necessary for the promotion of cross-border investments and openness. The 24 principles are based on the four following guiding principles of the sovereign wealth funds:
- “To help maintain a stable global financial system and free flow of capital and investment;
- To comply with all applicable regulatory and disclosure requirements in the countries in which they invest;
- To invest on the basis of economic and financial risk and return-related considerations; and
- To have in place a transparent and sound governance structure that provides for adequate operational controls, risk management, and accountability.” (4)
While the guiding principles listed above assign an existential purpose to the sovereign wealth funds, the Santiago Principles offer practical advice about the management, investment style, risk analytics, logistical support, and upkeep needs of any sovereign wealth fund. Some select examples from the twenty-four can be found below:
“GAPP 7. Principle. The owner should set the objectives of the SWF, appoint the members of its governing body(ies) in accordance with clearly defined procedures, and exercise oversight over the SWF’s operations.
GAPP 11. Principle. An annual report and accompanying financial statements on the SWF’s operations and performance should be prepared in a timely fashion and in accordance with recognized international or national accounting standards in a consistent manner.
GAPP 15. Principle. SWF operations and activities in host countries should be conducted in compliance with all applicable regulatory and disclosure requirements of the countries in which they operate.” (7-8)
Considering the rather structural and specific nature of the 24 principles, the analysis conducted in this paper will concentrate on the alignment of Chinese sovereign wealth funds with the four guiding principles established as the basis of the Santiago Principles. While Santiago Principles are only applicable to whether a sovereign wealth fund is a rule-maker, a rule-taker, or a rule-breaker, the guiding principles that form the basis of the Santiago Principles in the first place carry significations with themselves that are transferrable to the Chinese state itself. A sovereign wealth fund that does not abide with the purpose of a sovereign wealth fund established through the principles, is a fund that breaks the rules; a fund that built those purposes in the first place is a fund that can be considered a rule-maker; and a fund that operates mostly in line with the expectations of these four guidelines is a true rule-taker.
CIC and SAFE: Chinese Sovereign Wealth Funds as Case Studies
In this part of the investigation, CIC and SAFE, two Chinese sovereign wealth funds will be investigated as case studies. The following discussion will be mostly based on the policies and practices outlined in their annual reports, as well as some opinions and reflections expressed by their management teams. First and foremost, one can claim that the Chinese state took on the role of a rule-maker, as CIC was not only one of the founding members of the IFSWF, but also one of the co-drafter of the twenty-four Santiago Principles. As detailed on the 2016 annual report of the CIC:
“To assure countries and markets that sovereign wealth funds were well-organized to invest as economic and financial entities, sovereign wealth funds with over $500 million of assets came together and established the International Working Group on Sovereign Wealth Funds in April 2008. With the support of the International Monetary Fund (IMF), they drafted the Santiago Principles. As one of the drafters, CIC was involved in all the discussions and revisions of the Santiago Principles. The Santiago Principles were released in October 2008, and the International Working Group was renamed the International Forum of Sovereign Wealth Funds in April 2009. CIC was a charter member and then-CIC Chairman of the Board of Supervisors Jin Liqun was elected as the IFSWF’s First Deputy Chair.” (56)
As seen from the passage above, together with other sovereign wealth funds, CIC was one of the rule-makers in the sovereign wealth fund industry. It was one of the major incumbents that participated at the literal legislation of the principles that will guide the industry in the many years to come. They, establishing the status quo along with other founding members of the IFSWF, worked hard at promoting public understanding of sovereign wealth funds and their investment activities, implementing the Santiago Principles, and buttressing the IFSWF. CIC hosted the 3rd annual meeting of IFSWF and led the development of the Beijing Declaration that was released shortly after the annual meeting. The Beijing Declaration “urged countries to work together for global economic recovery and stabilization of the financial market, and to help develop an open, fair and non-discriminatory investment environment for sovereign wealth funds” (59). At the very same meeting, Mr. Jin Liqun from the CIC was elected Chair of the IFSWF. In March 2016, CIC continued to support the making of regulations about sovereign wealth funds through attending the legislative meeting at Baku. At the March 2016 meeting, participants designed working guidelines on knowledge-sharing and on improving the IFSWF’s internal research capability. To this day, the CIC seems to be continuing to make the rules of the sovereign wealth funds industry. At the time of the writing of this article, the home page of CIC presents the following news:
“On November 9th, Xi Jinping, the President of the People’s Republic of China, and Donald Trump, the President of the United States of America attended a ceremony of utmost importance. In this ceremony, Tu Guangshao, President of the CIC, and Lloyd Blankfein, Chairman and CEO of the Goldman Sachs Group, Inc. established the China-US Industrial Cooperation Partnership, L.P.. This partnership is intended to establish a fund, funded by CIC’s investments with a broad mandate to invest in American companies that have developed or can develop material business connections to China. CIC’s website says that the fund’s intention is to “develop a stronger China-US trade and investment relationship.”
The agreement described on CIC’s is particularly remarkable as it is a public-private international partnership established by a sovereign wealth fund, with the goal of developing stronger connections between Chinese and American companies. From the remarkable agreement reached with the American bank Goldman Sachs, one can see the ways in which CIC is stepping beyond the established four guidelines of the Santiago Principles. CIC, showcases through this deal, that it is not merely using its investments only as a tool to generate investment income, but also as a state-owned vehicle of constructing linkages between Chinese and American firms, acting the role of a facilitator of trade with and investment in China. On this topic, the CIC 2016 Annual Report stated the following priorities:
“Focusing on special regions and industries from the China angle, we helped Chinese companies connect with foreign companies and facilitated investment cooperation. We also accelerated CIC’s overseas institutional development, employing foreign investment and multilateral fund operations to complete high-profile direct investment projects in several major countries. (10)
Also, in 2016, CIC Capital increased investments in infrastructure, particularly high-quality core infrastructure assets. It collaborated with peer institutions, asset managers, sector investors and other like-minded partners, and carried out landmark projects in ports, railway, pipeline and telecommunication in Europe, Oceania, and Latin America.” (43)
The aforementioned priorities further confirm CIC’s role as a rule-breaker in the sovereign wealth fund industry, as they approach the role of a sovereign wealth fund not solely from an investor standpoint, but also as an investment cooperation and collaborator standpoint. While the Santiago Principles aim to position sovereign wealth funds solely as investment entities, CIC’s practices depict that what CIC sees itself as accomplishing is much farther than that. However, the Former Chairman and CEO of CIC, Ding Xuedong, argues “First, as a financial investor, we should pursue reasonable commercial returns as a primary objective” (3). His statement seeks to affirm CIC’s commitment to the Santiago principles, but also leaves open an arena of possibilities for a second and third order of objectives as well. A further indication of CIC’s trade facilitator, negotiator, and collaborator vision of itself can be seen from the commitment below:
“CIC is committed to mitigating the negative impact of investment protectionism and fostering an open, fair, and nondiscriminatory environment for international investment through open and honest dialogues. In 2015, senior executives of CIC visited government agencies and business partners in many countries and regions and were invited to a series of important bilateral and multilateral conferences and dialogues, including the China-US Joint Commission on Commerce and Trade, the China-UK Business Summit, the China-Russia Investment Cooperation Committee, the French Strategic Investment Attractiveness Council, and the China-Japan CEO and Former Senior Officials’ Dialogue.” (43)
What about the goals and objectives that the Chinese sovereign wealth funds point on explicitly in these reports? In its extensive 2016 annual report, SAFE lists a variety of its goals very explicitly. Among them are the following:
- “to study and propose policy suggestions for reforming the foreign exchange administration system so as to prevent balance of payments risks and to promote an equilibrium in the balance of payments;
- to study policy measures to make gradual advances in the convertibility of the RMB under the capital account and to cultivate and develop the foreign exchange market;
- to provide suggestions to and a foundation for the People’s Bank of China
- to formulate policy on the RMB exchange rate.” (35-47)
In contrast with SAFE’s variety of foreign-exchange policy formation priorities, the principles that underlie CIC’s investment activities can be seen as distinct yet more parallel to the underlying guidelines of the Santiago Principles. As a non-member of IFSWF, and as an entity that did not endorse the Santiago Principles, SAFE is able to completely divorce its vision of itself from the internationally accepted regulations. Hence, even among its two largest sovereign wealth funds, China could be seen as playing the role of the rule-maker with CIC and the role of the rule-breaker with SAFE at the same time. Four principles that underlie CIC’s investment activities are as follows:
- “CIC invests on a commercial basis. Its objective is to seek maximum returns for its shareholder within acceptable risk tolerance.
- CIC is a financial investor and does not seek control of the companies in its portfolio.
- CIC is a responsible investor, abiding by the laws and regulations of China and of recipient countries or regions and conscientiously fulfilling its corporate social responsibilities.
- CIC pursues investments based on in-depth research within an asset allocation framework to ensure a prudent and disciplined approach in both decision-making and investment activities.” (23)
One can easily spot the ways in which CIC’s principles are devised in parallel terms to the guidelines underlying the Santiago Principles. Even before the mention of a “new era” by Xi Jinping, the Vice Chairman and President of CIC, Tu Guangshao talked about a “new state of play” and a “new normal” to describe the state of China in 2016; “Despite the new state of play in the global market, and despite China entering a ‘new normal’ phase with new responsibilities engendered by the state-owned enterprise reform, we succeeded in overcoming all the tests and trials in achieving the goals our Board of Directors set at the start of the year.” (5) Tu Guangshao might be seen as implying that CIC has a role to play in this “new normal” that the Chinese political economy found itself in.
The 2016 annual report of CIC also includes a special mention of the importance of socially conscious investing and green investing. While these conversations are starting to be increasingly popular among personal and corporate investment entities, the conversation has not yet trickled down to the concerns of the sovereign wealth funds with the same speed. They are largely absent from the Santiago Principles as well. One, however, can observe CIC to be positioning itself as a responsible investor, investing at causes that alleviate the negative consequences of climate change, and provide assistance to the underprivileged and the poor. Taking on the position of a rule-breaker, CIC explains its priorities about responsible investing in the following way:
“Combating climate change and achieving green and sustainable development are closely linked to the well-being of a country’s people, and sovereign wealth funds, including CIC, are paying more attention to both. As a member of the International Forum of Sovereign Wealth Funds (IFSWF), CIC works with other sovereign wealth funds to find ways to fulfil its corporate social responsibilities. Given its concern for global well-being, CIC has pledged support for IFSWF’s climate change working group, contributing as a responsible investor to addressing climate change.
Based on its business portfolio, CIC capitalizes on its resources to work with the relevant government authorities in mobilizing private funding to help the poor and underprivileged. Through creative use of public-private partnerships, industry funds, bond issues and public listings, we have explored ways to alleviate poverty, and in doing so, accrued enormous corporate goodwill.” (19)
Last but not least, one should take notice that Tu Guangshao, Vice Chairman and President of CIC, chose to conclude his opening statement of both 2015 and 2016 annual reports through quoting a Chinese poem. (2) On one occasion, he quotes “Honing gives a sharp edge to the sword, bitter cold adds fragrance to the plum blossom,” and in another instance he says, “constant dripping wears away a stone, and persistence and hardship are but a way of life.” This trend in quoting Chinese poetry to conclude a statement, not only is a long-standing norm in many governmental and academic opening statements in Chinese landscape, but also can be seen as fulfilling the purpose of introducing Chinese classical poetry into the world of finance. It may be sending the strong message that in this “new era” espoused by Xi Jinping, communication norms are also altered and revised by the Chinese state. Once again, the sovereign wealth funds are interlinked and encompassed within the changing narrative of China, as the Chinese state slowly moves and constructs the “new era” for itself.
Conclusion
The analysis conducted above shows that the actions of Chinese sovereign wealth funds can be described as fitting to the rule-maker and rule-breaker categories within the contemporary landscape of the sovereign wealth funds industry. The role of Chinese sovereign wealth funds acting as rule-makers and rule-breakers can further be extended to the Chinese state itself, as it has previously been established in the paper; the sovereign wealth funds are merely institutional extensions of the Chinese state’s monetary ambitions. The palpable evidence discussed above that integrated the annual reports of CIC and SAFE along with statements provided by both of their managers showcase the ways in which China established a set of rules for the entire sovereign wealth fund industry and after a certain point in time started breaking those rules explicitly and implicitly as its foreign policy and economic needs necessitated. In that way, China utilized its sovereign wealth funds in line with the ways in which Xi Jinping envisioned the “new era” to look like: ideated and constructed by China in collaboration with other nation states, to be partially lead and ultimately disrupted by Chinese creativity and influence. Therefore, the China that used to be the rule-taker, necessitated by its needs to grow and stabilize itself socio-economically at the time, is now both a rule-maker and a rule-breaker. Even though the research question posed at the beginning of the investigation has been answered, the research conducted here could be extended and further analyzed to answer similar yet unanswered questions. A comparative approach in which China’s sovereign wealth funds were contrasted with American or European sovereign wealth funds would be an intriguing addition to observe the differences of the Chinese funds when contrasted to other rule-maker funds and their owner states. Furthermore, a study on a larger number of sovereign wealth funds with a more in-depth historical analysis could be conducted to further confirm the findings of this research and explore the particular nuances of each Chinese sovereign wealth fund and its respective contributions to China’s transformation to a rule-maker and a rule-breaker. Ultimately, Xi Jinping’s address was concrete enough to provide a set of general guidelines for the Communist Party members but also vague enough for the implemented and to-be-implemented visions to be predicted by further academic inquiry in political economy literature. If China succeeds in building the promised “new era,” the implications of a multi-centered world would reach far beyond the confines of the sovereign wealth funds. For now, however, China is far from fully realizing that multi-centered “new era” in all realms of the political economic order.
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Cengiz Cemaloglu is a fourth year undergraduate student at Harvard University pursuing a joint concentration in Social Anthropology and Government, a secondary in Philosophy, and a language citation in Mandarin Chinese. He is a Williams/Lodge International Government and Public Affairs Fellow at the Weatherhead Center for International Affairs at Harvard University.
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