After months of rumors, news of a Chinese sovereign wealth fund was finally confirmed in March 2007. Making his address to the National People’s Congress, Finance Minister Jin Renqing said an agency would be formed to invest part of China’s growing stockpile of foreign currency reserves.
The announcement also confirmed another rumor making its rounds: That China would base its new agency on one run by the Singapore government.
“We will draw upon the successful practices of other countries, for example Singapore’s Temasek, to manage China’s foreign exchange reserves,” Jin said.
The fund was eventually named China Investment Corp (CIC), and it was launched last September, with US$200 billion in starting capital. It also catalyzed an ongoing global debate about sovereign wealth funds’ relationships with their governments. The juxtaposition of Chinese and Singaporean agencies sheds some light on the picture.
According to an exhaustive new report on sovereign wealth funds by research and consulting firm Monitor, these agencies were created in two major waves.
In the 1970s, emerging Asian economies began putting their fiscal surpluses into agencies that, in terms of risk, were more active than central banks but more conservative than state-owned enterprises. This model was first used by the Kuwait Investment Authority in 1953. Singapore’s Temasek Holdings and Government Investment Corp (GIC) and Norway’s Government Petroleum Insurance Fund were created in this phase.
The next wave began in 2000, giving China and Russia their first sovereign funds. Significantly, these new entities make up half of the world’s 36 sovereign wealth funds, according to Monitor. Sovereign wealth funds now collectively account for US$1.9-2.9 trillion under management, the study estimates.
“The combination of sovereign ownership, large size and impressive growth prospects, appetite for risk, and lack of transparency constitutes a perfect storm for political controversy,” the report said.
It’s important to note the term “sovereign wealth fund” has no globally agreed-upon definition. Agencies may be funded by proceeds from natural resources, fiscal surpluses or foreign exchange reserves. They range in size from US$2 billion (Azerbaijan) to US$875 billion (Abu Dhabi Investment Authority).
Bailing out i-banks
The ongoing credit crisis has attracted sovereign wealth funds to weakening financial institutions in droves, and the Chinese and Singaporean players are no different. GIC spent US$16 billion on stakes in UBS and Citigroup. Temasek bought a 9.5% holding in Merrill Lynch for US$4.4 billion. China’s fund made its debut investment of US$3 billion in private equity firm Blackstone last year. That stake has lost about 40% in paper value.
Since then, CIC has spent US$5 billion on a 9.9% stake in Morgan Stanley and invested US$3.2 billion in a JC Flowers private equity fund.
“You can argue that the CIC’s stakes in various other companies – Blackstone, Morgan Stanley and the like – are also similar to Temasek’s approach of taking large stakes in companies and not just acting as a passive portfolio manager,” said Brad Setser, a fellow for geoeconomics at the Council on Foreign Relations in New York who studies sovereign funds.
The structures of the Chinese and Singaporean funds also share some similarities. When CIC was set up, it also absorbed an investment agency called Central Huijin, which held stakes in China’s state-owned banks, and was owned by the central bank. Temasek was created to hold and manage assets formerly owned by Singapore’s finance ministry.
“The shift of Huijin’s stakes in the state banks to the CIC is very Temasek-like,” Setser said.
But that’s where the similarities end. The chief difference between a Singaporean fund and CIC is the degree of transparency the entity has chosen to apply.
The Peterson Institute for International Economics has devised a “scoreboard” that ranks the world’s funds on four dimensions, with “transparency and accountability” responsible for nearly half the possible total points. Funds get points for publicly disclosing their size, issuing annual or quarterly reports, submitting to external audits and detailing the asset classes it invests in, among other things.
Overall, CIC was ranked two places behind Temasek and GIC in the bottom half of the table. On accountability and transparency, however, the difference was pronounced. Here, CIC managed 14 out of 100 to Temasek’s 61 and GIC’s 39. Temasek publishes an annual report divulging its returns and locations of its investments, for example, while CIC does not. The Singapore funds have also voluntarily pledged to invest in the US without political motives.
“CIC has a long way to go, and Temasek is making itself more transparent and accountable,” said Edwin Truman, the policy brief’s author.
His conclusion is supported by Monitor’s study.
“Temasek is one of the most transparent [sovereign wealth funds], and is in many ways considered a model for the other funds. GIC is also one of the more transparent funds,” said Drosten Fisher, who worked on the Monitor report. “In contrast, CIC is one of the least transparent funds, and does not provide a public list of deal information.”
While CIC is China’s de facto sovereign wealth fund, it is not the only government agency investing abroad. The State Administration of Foreign Exchange (SAFE) and National Social Security Fund (NSSF) have become active buyers overseas. SAFE has invested in two oil and gas companies – Total and BP – while NSSF, China’s pension fund, has steadily pushed for approvals to increase its investment options.
The relationship among these three agencies contains some inherent conflicts of interest. For example, both SAFE and CIC invest China’s foreign reserves, but they answer to different masters. SAFE is under the sway of the central bank while CIC makes its own decisions.
“SAFE wants to show that if given the chance to invest more aggressively, it can get higher returns – so there is no need to transfer additional funds to CIC,” said Setser.
Interestingly, both SAFE and NSSF may be more transparent than CIC. The Peterson Institute places NSSF at the bottom of its ranking for pension funds, but it still scores 82% to CIC’s 14% on transparency. SAFE, meanwhile, publishes data on the size of its foreign holdings each quarter, something that CIC does not do, Setser noted.
Not only is CIC less transparent than Singapore’s funds, it may also be more aggressive. GIC has only recently taken large stakes in individual companies while CIC has done that from the start.
“That to me has been the biggest surprise – most [sovereign funds] start out fairly conservatively, with simple equity allocations and a lot of external managers, like buying equity index funds; CIC started out very aggressively, taking big stakes in big companies,” Setser said.
While China may have set out to learn from Singapore’s approach, its investment agencies appear to be fundamentally different in terms of strategy and transparency.
But in a global debate often couched in the language of fear, even the opaque CIC may be a relatively benign force. The Monitor study, for example, concludes that there was “little evidence” to suggest that sovereign funds were interested in controlling stakes in sensitive sectors in developed countries. Another research report, by the think-tank Policy Exchange in London, agreed.
“There are no examples of [sovereign funds] seeking to integrate existing and prospective investments to monopolize or cartelize strategic – or indeed, any – markets in Western countries,” the Policy Exchange report said.
It could be time to let the hullaballoo surrounding the Chinese and Singaporean sovereign wealth funds die down.