Sovereign funds of China

Public financing mechanism

This article relies largely or entirely on a single source. Relevant discussion may be found on the talk page. Please help improve this article by introducing citations to additional sources.
Find sources: "Sovereign funds of China" – news · newspapers · books · scholar · JSTOR (May 2024)

|

Sovereign funds of China are mechanisms through which the Chinese state acts as a market participant with the goals of supporting key domestic economic sectors, advancing strategic interests internationally, and diversifying its foreign exchange reserves.

## Significance

[edit]

Typically, sovereign wealth funds are mostly commodity based.[1]: 5 They have often been established by commodity-exporting states, especially those which are rich in oil resources.[1]: 5 These typical sovereign wealth funds are capitalized by the sovereign's national resources and help stabilize national budgets by weathering commodity price fluctuations.[1]: 5

In contrast, China funds its sovereign funds through the state leveraging its financial and political resources.[1]: 6 This includes capitalizing a fund through the issuance of new debt such as government bonds.[1]: 7 Researcher Zongyuan Zoe Liu (while working at the US Council on Foreign Relations) coined the term "sovereign leveraged funds" to distinguish China's sovereign funds from the more typical commodity-based sovereign funds. She wrote: "A distinctive feature of SLFs is their funding scheme, which relies upon a series of complicated financial transactions, including debt issuances and other forms of financial leverage."[1]: 6 Although China's sovereign funds are structured in the manner of private entities, they are state funded and their managers are appointed by the Communist Party.[1]: 71

China's sovereign funds also use state assets like foreign exchange reserves which are converted to riskier but potentially more profitable capital in the hands of the fund.[1]: 7

China's sovereign funds have contributed capital to policy-oriented state financing institutions including the China Development Bank, the Silk Road Fund, and the Export–Import Bank of China.[1]: 5 In turn, these policy financing institutions have played a major role in supporting the Belt and Road Initiative (BRI).[1]: 5 Of China's sovereign funds, only the Silk Road Fund was capitalized with an explicit geo-economic mission (in the Silk Road Fund's case, supporting the BRI).[1]: 21

China's sovereign funds are part of China's "national team" of institutional investors that can buy depressed assets to add liquidity to the market and improve its stability.[1]: 17

China's sovereign funds also help finance state procurement of assets overseas, support Chinese enterprise in engaging in mergers and acquisitions abroad, and support Chinese tech start-ups.[1]: 11 Sovereign funds are among the mechanisms through which the Chinese state seeks to cpaitalize industrial development.[2]: 8

As Liu summarizes, these funds "reduce the state's reliance on non-market measures, when engaging with the market. These funds can use equity participation to become direct participants in the market, and provide capital to companies in the industries prioritized by the state."[1]: 9 China's sovereign funds have developed to become important instruments of Chinese financial statecraft.[1]: 11

In the Introduction to her book "Sovereign funds: How the Communist Party of China finances its global ambitions", Liu wrote:[1][page needed]

> By using China’s state-owned capital to fill the cash coffers of Western firms while advancing national interests, China’s sovereign funds could quietly use the US-led global economic system to put an end to American hegemony. If US policymakers fail to understand the political-economic model of China’s sovereign funds and how they advance the global ambitions of the Communist Party of China (CPC), then the United States risks surrendering its leadership in financial markets earlier than anticipated and in unexpected parts of the world.

## History

[edit]

China's development of its sovereign funds was influenced by the experiences of the 1997 Asian Financial Crisis and the 2007-2008 global financial crisis.[1]: 11 According to researcher Zongyuan Zoe Liu, "The CPC leadership responded to these shocks by reexamining the boundaries of state-market relations in China and reinterpreting the Party's commitment to reform and opening up."[1]: 11 This included reinterpreting China's approach to managing its foreign currency reserves and other state-owned assets more generally.[1]: 11

China's first sovereign fund was Central Huijin, which it established in 2003.[1]: 12

China's sovereign wealth funds entered global markets in 2007,[1]: 4 with the establishment of China Investment Corporation (CIC).[1]: 14 Since then, the scale and scope of China's sovereign funds have expanded significantly.[1]: 4 As of 2019, China's funds collectively managed in excess of US$2 trillion assets,[1]: 4–5 and as of early 2022, 31% of all assets held by sovereign funds were held by Chinese sovereign funds.[3] China's four largest sovereign funds are each among the ten largest sovereign funds worldwide.[3]

CIC's task was to invest in foreign markets, seeking investments that were higher risk and higher reward than government bonds.[1]: 14 Its entry into global markets shortly before the global financial crisis meant that its early performance was lackluster.[1]: 14

In 2009, expansion of China's sovereign funds was supported by two primary factors.[1]: 67 Following the global financial crisis, a domestic political consensus developed for China to more aggressively invest its foreign exchange reserves.[1]: 67 Simultaneously, foreign states sought to benefit from an influx of Chinese capital.[1]: 67 These conditions were favorable for the development of China's sovereign funds and CIC, the China-Africa Development Fund, and several State Administration of Foreign Exchange-affiliated funds were further developed at that time.[1]: 67

The lackluster performance of CIC created a political opening in 2013 for the State Administration of Foreign Exchange to expand the sovereign funds under its jurisdiction.[1]: 14

In 2013, President Xi Jinping called for the creation of state-owned investment companies to invest in key industries such as civil aviation, energy, mineral resources, nuclear power, and logistics.[1]: 15 Finance Minister Lou Jiwei, who had prior sovereign fund experience as the chair of CIC and its former CEO, was tasked with developing this proposal and served as lead author for the State Council's "Opinions on Reforming and Improving the State-Owned Assets Management System."[1]: 15

In November 2022, China's sovereign fund China Investment Corporation called for the promotion of globalization and the “free, open and orderly” flow of international investment to support “steady recovery and sustainable development of the world economy.”[4]

## Specific funds

[edit]

China's sovereign funds include two primary funds, the China Investment Corporation (CIC) and the State Administration of Foreign Exchange (SAFE), as well as numerous other funds.[1]: 4–5

### Central Huijin

[edit]

Main article: Central Huijin Investment

China's first sovereign fund, Central Huijin's creation in 2003 was inspired by what Chinese policymakers learned during the 1997 Asian financial crisis.[1]: 11–13 It was initially created as special purpose vehicle for recapitalizing Chinese banks.[1]: 13 Central Huijin is now the largest shareholder of the vast majority of Chinese financial institutions.[1]: 23 As of 2019, it owned the second-largest share of China Development Bank.[2]: 85

### China Investment Corporation

[edit]

Main article: China Investment Corporation

In 2007, CIC was established.[1]: 14 CIC was established through the use of explicit leverage.[1]: 7 To capitalize CIC, the Ministry of Finance issued bonds, used the bond issuance proceeds to buy foreign exchange reserves from the People's Bank of China, and in turn funded CIC with the purchased reserves.[1]: 29 CIC was then tasked with investing in foreign markets that were both higher risk and higher reward than investing in government bonds.[1]: 14

### State Administration of Foreign Exchange

[edit]

Main article: State Administration of Foreign Exchange

SAFE is the administrative unit which handles foreign exchange management for the People's Bank of China.[1]: 5 It oversees a number of sovereign funds that invest part of China's foreign exchange reserves in investment vehicles including infrastructure projects, real estate, private equity, and strategic resources.[1]: 30

### Funds within SASAC

[edit]

See also: State-owned Assets Supervision and Administration Commission of the State Council

As of June 2022, there are 19 state-owned capital investment companies under SASAC.[1]: 16 These were restructured from previously existing state-owned enterprises within SASAC's jurisdiction.[1]: 16

### China-Africa Development Fund

[edit]

Main article: China-Africa Development Fund

## See also

[edit]

* China Government Guidance Fund
* Economic history of China (1949–present)
* Policy banks

## References

[edit]

1. ^ a b c d e f g h i j k l m n o p q r s t u v w x y z aa ab ac ad ae af ag ah ai aj ak al am an ao ap aq ar as Liu, Zongyuan Zoe (2023). Sovereign Funds: How the Communist Party of China Finances its Global Ambitions. The Belknap Press of Harvard University Press. doi:10.2307/jj.2915805. ISBN 9780674271913. JSTOR jj.2915805.
2. ^ a b Chen, Muyang (2024). The Latecomer's Rise: Policy Banks and the Globalization of China's Development Finance. Ithaca and London: Cornell University Press. ISBN 9781501775857.
3. ^ a b Zhang, Hannah (2022-02-01). "China's Sovereign Wealth Funds: Too Big to Be Ignored". Institutional Investor. Retrieved 2023-06-20.
4. ^ Tang, Frank (2022-11-11). "China's Sovereign Wealth Fund Calls for 'Free, Open, Orderly' Investment Flow". South China Morning Post. Retrieved 2023-06-20.

* v
* t
* e

Economy of China

Companies of China

History|

* History
* Reform
* Five-year plans
* Industrial Revolution
* Iron rice bowl
* Three-anti and Five-anti Campaigns
* Great Leap Forward
* Four Modernizations
* Socialist market economy
* Deng Xiaoping's southern tour
* "Grasping the large, letting go of the small"
* Scientific Outlook on Development
* Historical GDP
* Population history
* 1949–1976 wage reform

Industries|

* Industry
* history
* Advanced materials
* Aquaculture
* Automotive
* Aviation
* Aircraft
* Aerospace
* Beer
* Biotechnology
* Business process outsourcing
* Cement
* Coffee
* Container
* Cotton
* Electric motor
* Electric power
* Electronics
* Film
* Fishing
* Gambling
* Hedge fund
* Internet
* Media
* Mining
* gold mining
* Mobile phone
* Online gaming
* Pearl farming
* Pharmaceuticals and pharmacy
* Publishing and academic publishing
* Radio
* Railway
* equipment industry
* Rare earth
* Real estate
* Renewable energy
* Securities
* Sex toys
* Shipping
* Silk
* Software
* Steel
* Telecommunications
* Television
* digital
* Tourism
* Textiles
* Video gaming
* Wine

Development Zones|

* Dalian Software Park
* Megalopolises in China
* Special Economic Zones
* Suzhou Industrial Park
* Zhangjiang Hi-Tech Park

Energy|

* Energy policy
* Coal
* Oil
* Oil shale
* Oil refineries
* Nuclear
* Renewable
* Wind
* Solar
* Geothermal

Trade and infrastructure|

* Trade history
* World Trade Center
* Transport
* Communications
* Postal history
* Tourism
* Shipping
* Illegal drug trade
* Hong Kong Trade Development Council
* Ports
* Water supply and sanitation
* Exports
* Trading partners

Law and regulations|

* Tax system
* Labor contract law
* Labor relations
* Food safety
* Intellectual property

Finance and banking|

* Accounting
* Banking
* History
* Central bank
* Other banks
* Beijing Financial Street
* Financial system
* China Banknote Printing and Minting Corporation
* China Chengtong Holdings Group
* China Government Guidance Fund
* China-Africa Development Fund
* China Integrated Circuit Industry Investment Fund
* China Internet Investment Fund
* China Reform Holdings Corporation
* National Fund for Technology Transfer and Commercialisation
* China Investment Corporation
* CITIC Group
* Financial services
* Renminbi
* Foreign exchange reserve
* Hedge fund industry
* Stock Exchanges
* Dalian Commodity Exchange
* National Equities Exchange and Quotations
* Beijing Stock Exchange
* Shanghai Stock Exchange
* SSE Composite Index
* Shanghai Metal Exchange
* Stock Exchange Executive Council
* Shenzhen Stock Exchange
* SZSE Component Index
* Zhengzhou Commodity Exchange

Government institutions|

* All-China Federation of Industry and Commerce
* All-China Federation of Trade Unions
* China Council for the Promotion of International Trade
* China Securities Regulatory Commission
* General Administration of Customs
* Ministry of Commerce
* Ministry of Finance
* Ministry of Industry and Information Technology
* National Financial Regulatory Administration
* National Bureau of Statistics of China
* National Development and Reform Commission
* National Energy Commission
* State-owned Assets Supervision and Administration Commission
* State Administration for Market Regulation
* State Administration of Foreign Exchange
* State Administration of Taxation

Development|

* International rankings
* Social welfare
* Poverty
* Corruption
* Income inequality
* Standard of living
* Foreign aid
* Urbanization
* Internal migration
* Emigration
* Rural credit cooperative

National economic initiatives|

* Beijing Consensus
* Belt and Road Initiative
* Common prosperity
* Dual circulation
* Go Out policy
* Made in China 2025
* Youth Business China

Regional economic initiatives|

* Asian Infrastructure Investment Bank
* Beibu Gulf Economic Rim
* Bohai Economic Rim
* China Western Development
* Guangdong–Hong Kong–Macau Greater Bay Area
* Mainland and Hong Kong Closer Economic Partnership Arrangement
* Mainland and Macau Closer Economic Partnership Arrangement
* Northeast China Revitalization
* Pearl River Delta Economic Zone
* Regional Comprehensive Economic Partnership
* Rise of Central China Plan
* Western Taiwan Straits Economic Zone
* Yangtze River Delta Economic Zone
* Zhongyuan Economic Zone

Events|

* 2005–2011 property bubble
* 2007 export / pet food recalls
* 2007 stock bubble
* 2007 slave scandal
* 2008–2009 economic stimulus plan
* 2010 Expo
* 2015–16 stock market turbulence
* Protein export contamination
* China–United States trade war
* 2020–2021 reform spree

Related topics|

* Agriculture
* Bankruptcy
* Companies
* Largest
* Top 500
* Largest SOEs
* The Hongs
* Demographics
* Globalization
* Globalization and women
* National Standards
* China Compulsory Certificate
* Made in China
* Mingong
* List of Chinese by net worth
* Chinese economists
* Science and technology

* See also: Category
* Outline of China
* Economy of East Asia

*[v]: View this template
*[t]: Discuss this template
*[e]: Edit this template