Publicaties

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The recent emergence of a Chinese sovereign wealth fund with initial capital of $200 billion poses a raft of exciting but delicate economic and security questions for European policy makers.
In the US, the Chinese fund has become highly, and anxiously, politicized. In the European Union, many senior officials have welcomed sovereign wealth funds in general as a potential new investment source. However, they have also adopted a somewhat cautionary stance, counselling that investment strategies underlying these sovereign wealth funds may be driven by political rather than pure business determinants. European Commission President Jose Manuel Barroso explicitly articulated these European security concerns, recently warning that "we cannot allow non-European funds to be run in an opaque manner or used as an implement of geopolitical strategy."

The China Investment Corporation (CIC) fund is still dwarfed by the long-standing sovereign wealth funds of the Abu Dhabi Investment Authority ($500-875 billion), that of the Government of Singapore Investment Corporation (which may be over $300 billion) and even that of the Norwegian Government Pension Fund (also over $300 billion). However, if the Chinese fund is permitted to further draw upon Beijing's enormous foreign exchange reserves (estimated in December 2007 at a robust $1.53 trillion) then it may well expand very rapidly.

Barroso, among others, is actively pushing for the development of a broader global regulatory approach to sovereign wealth funds, including that of China, with a premium on what he terms "transparency, predictability and accountability." The European Commission has privately distributed to its members a sovereign wealth fund voluntary code of conduct dealing with transparency, governance and best practices that it hopes the International Monetary Fund will transform by the end of the year into an international set of principles. The aim is that ultimately this code will be "voluntarily" adopted by the sovereign wealth funds themselves.

Clearly, what many Europeans would like from the Chinese and other foreign investors is agreement on the following principles. Sovereign wealth funds should agree to:

• Limit the percentage of a European company that a fund may purchase
• Restrict voting shares in acquired companies
• Avoid board representation in acquired companies
• Publish accounts, and
• Be barred from certain sensitive sectors in the European economy, such as defence, transport and telecommunications.

Under American pressure, Singapore and Abu Dhabi have expressed a readiness to both increase transparency and renounce "geopolitical goals" in fund decision making, but the Chinese—while being prepared to discuss the issue—have balked at formal commitments.

The key question here then is: at a time when traditional sources of liquidity are rolling back and, in some cases, evaporating, are these European concerns truly warranted, or are obstacles being created simply to block Chinese and other foreign investment into Europe?

The Chinese claim a best practice code is unnecessary. To be fair to the CIC, although it has as yet not set out a formal investment strategy it has nevertheless gone out of its way to try and address European concerns. CIC representatives have shown great understanding of European sensibilities, stressing that they are not interested in investing in sectors of obvious strategic import such as oil and airline companies, telecommunications or infrastructure. Significantly, Beijing has so far steered away from deals that might trigger political firestorms, such as the high-profile ill-fated attempt by the Dubai-owned DP World to purchase up to half a dozen US seaports.

The Chinese have also been quite adamant that they have no intention of investing in European technology companies in order to siphon off technological know-how—a long-held concern often expressed by both European and American policymakers.

And Beijing official have also stressed that they will not be purchasing strategic controlling stakes in European companies.

So far, at least, Chinese investment patterns have indeed demonstrated both gradualism and a marked restraint. Thus, for example, in the case of their injection of US$5 billion into Morgan Stanley, the Chinese helped steady an important financial institution buffeted by the sub-prime crisis, while simultaneously limiting their acquisition to 9.9 percent of the company and shunning any corporate management role.

When China purchased $3 billion worth of shares in the Blackstone Group—another high-profile acquisition—the stake acquired was less than 10 per cent of the business and consisted solely of non-voting shares.

The alliance of Aluminium Corporation of China with Alcoa to purchase a 12 per cent shareholding in the Anglo-Australian mining conglomerate Rio Tinto may be interpreted as heralding a more aggressive policy, but the fact is that this venture can still be justified from a Chinese perspective on economic and competition grounds.

Again and again Beijing officials have underscored that the goal of the CIC is not political or strategic advantage but investment returns. CIC Deputy General Manager Yang Qingwei has, for example, been adamant that "the company's principal purpose is to make profits." Furthermore, Premier Wen Jiabao himself has gone out of his way to state that the CIC "is entirely commercial" and that "the government does not meddle." Political and security advantages are not the goals here.

The issue of transparency has been vexing for China. Notably, the CIC is also beginning to take steps aimed at assuaging European trepidations. Chairman of the CIC board Lou Jiwei recently commented that "we will increase transparency without harming the commercial interests of CIC," but, he continued, this would need to be a gradual process because "if we are transparent on everything, the wolves will eat us up." The Chinese are adamant that no investment fund —not only the sovereign kind—can afford total transparency in a competitive market.

These Chinese efforts to calm foreign fears and engender global confidence in their investment strategies have not gone unnoticed in Europe. Thus, European Union Internal Market Commissioner Charlie McCreevy, who has criticized sovereign wealth funds for lack of transparency, has also said, "There is no, as far as I am aware, no instance of sovereign wealth funds acting in any manner other than responsibly up until now."

Mixed European responses reflect different national approaches to the Chinese and other sovereign wealth funds. Comments by German Chancellor Angela Merkel and French President Nicolas Sarkozy have indicated their interest in adopting measures to protect local companies and sectors against foreign intervention. Sarkozy has spoken of the need to defend "the primordial economic interests of the nation" and the requirement to protect various "strategic sectors" from the risk of foreign takeovers. Similarly, in Germany the Bundestag is seeking legislation to defend "public order and security" in the face of foreign investment.

Policymakers in the United Kingdom, confident in the regulatory competencies of the Financial Services Authority to deal with all investors irrespective of their national identity, have tended to demonstrate a more relaxed and, as a result, a more hospitable approach. Prime Minister Gordon Brown, in his meeting this January with Chinese Premier Wen Jiabao, suggested that the CIC set up an office in London. This idea was first advanced by Lord Mayor of London John Stuttard in his meeting with CIC head Lou Jiwei late last year. The aim in London is to attract Chinese funds and reaffirm the capital's position as a global hub of financial capital, including burgeoning sovereign wealth funds.

Given the significant gap between worst fears and practical realities, it is not going to be easy to establish a unified European position. Nevertheless, it would clearly not be beneficial for the Europeans to adopt an aggressive and unwelcoming stance to Chinese wealth funds. So far, at least, Chinese conduct has generally been exemplary. There is little to be gained for Europeans to follow the US route of congressional enquiries, constant demands for transparency and tax threats.

The Chinese may ultimately come around to the idea of economic confidence-building measures, such as the adoption of an explicit voluntary code of conduct in a form that will satisfy Western sensibilities. However, if this does happen, it will not happen soon. Other sovereign wealth funds may need to lead the way before the Chinese feel ready to adopt policies that place them in what they now consider to be a disadvantage in a challenging but also at times an economically and politically hostile environment. In the meantime, Europeans should adopt declaratory positions that encourage and not deter Chinese and other government investments and take comfort from informal assurances and actual investment conduct.