One of the enduring mysteries of China’s economic rise is why the country’s extended engagement with Western capitalism and democracy didn’t diminish the role of the state and lead to greater political and economic liberalization. After all, dictatorships in South Korea, Taiwan, Thailand, and other countries melted away after the West’s embrace spurred middle-class opposition that doomed authoritarian rule.
Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions, Zongyuan Zoe Liu, Belknap Press, 288 pp., $45, June 2023
Zongyuan Zoe Liu provides a provocative answer. Beijing has marshaled the enormous horde of dollars it accumulated through trade with the West to bolster its economy when it flags and extend its financial reach globally, she argues. The more than $2 trillion managed by China’s sovereign wealth funds, or SWFs, she says, finances what some economists dub “CCP Inc.”
“If US policymakers fail to understand the political-economic model of China’s sovereign funds and how they advance the global ambitions of the [Chinese Communist Party, or CCP], then the United States risks surrendering its leadership in financial markets earlier than anticipated and in unexpected parts of the world,” she warns in her most recent book, Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions.
Liu, a research fellow at the Council on Foreign Relations and Foreign Policy columnist, makes a persuasive case about the important role these funds play in buttressing China’s domestic economy. But she’s more alarmist than convincing about their role internationally. Parts of her book could be read as a tale of inexperienced Chinese financial officials getting fleeced by Western capitalists.
Still, her book is bound to be a go-to resource for understanding China’s powerful but little-understood sovereign funds. SWFs are state-owned investment funds financed by a country’s financial reserves. Rather than invest those funds in low-yielding U.S. Treasury bonds—boring but safe investments—many countries, especially energy-rich ones, have created SWFs to try to make more profitable, though risky, investments. In some ways, they invest like college endowment funds. Estimates vary, but globally SWFs manage about $12 trillion in assets, according to Global SWF, a research firm that tracks state-owned investors.
But, of course, SWFs aren’t run by universities but by governments, including some that are hostile to the United States. After the 9/11 attacks, U.S. lawmakers feared investments by Arab states and pressured a Dubai government-owned company, Dubai Ports World, to drop plans to buy six U.S. seaports. But political worries change. Emirati investment is now so welcome that chipmaker GlobalFoundries, part of an Abu Dhabi SWF called Mubadala Investment, recently received a $1.5 billion U.S. Commerce Department grant to expand its U.S. facilities. Meanwhile, Trump son-in-law Jared Kushner’s investment fund gets much of its cash from a Saudi SWF.
Now it’s Chinese investment that’s suspect, often rightly so.
But China ended up with this powerful tool somewhat by accident, rather than by conspiracy, as Liu makes clear. Beijing’s financial mandarins were a conservative group who saw how the economies of neighboring countries were pulverized when investors fled with their dollars during the 1997-98 Asian financial crisis, making it impossible for governments to pay their foreign debts. In response, Beijing blocked capital outflows more sharply, threatened jail time for those who sneaked dollars overseas, and accumulated vast dollar reserves from its enormous trade surplus.
With one exception, a fund that backed China’s Belt and Road Initiative (BRI), Liu writes, “China’s sovereign funds were capitalized without explicit geoeconomics or geostrategic mandates.”
Once the country had accumulated $1.1 trillion in reserves by 2006, then about the size of the Brazilian economy, China’s Finance Ministry became convinced there were better ways to invest the country’s money than buying U.S. Treasurys.
The Chinese government had some experience deploying the nation’s reserves. In 2003, it created Central Huijin Investment, which invested tens of billions of dollars from the reserves to rid China’s largest state-owned banks of nearly all their bad debts, using techniques developed in the capitalist West. This was hardly part of a CCP grand plan; it was basic financial management similar to how the United States handled the failure of insurer AIG…
Read More: How Powerful Are China’s Sovereign Funds?