The Chinese Communist Party is using the country’s sovereign wealth funds to invest in critical sectors abroad to buy strategic influence. This new focus comes in the backdrop of the beleaguered Belt and Road Initiative as well as the country’s private sector losing international business.
Through sovereign wealth funds (SWFs), the CCP can not only earn profit and find global leverage, but it can also avoid scrutiny by Western governments. The scrutiny of Chinese companies has led to even some companies delisting from the US stock market and divesting their real estate assets. The CCP controls China’s vast foreign exchange reserves and invests them in strategic assets through these SWFs. The new assets include ports in Melbourne, prime real estate in London, French oil company Total.
Unlike earlier, money in the SWFs is invested in China’s private equity firms, which then purchase foreign assets. This indirect approach allows Chinese investments to often fly under the radar.
It now maintains an equally large pool of foreign reserves in state-led commercial banks and state-policy banks. But through SWFs, ostensibly shadow reserves usually associated with oil in Middle Eastern and Nordic countries, China is fast reshaping the investment landscape.
The China Investment Corporation has replaced Norway’s Government Pension Fund Global to become the world’s largest sovereign wealth fund. While Norway’s SWF reported a loss in 2022, CIC reported a profitable return on its diversified investments around the globe. China’s SWFs have expanded because of excess foreign reserves being diverted to these funds since 2007. This means they have a wide bandwidth to invest in assets that may not be accessible to state-owned banks.
CIC has assets worth $1.35 trillion under its belt and, in 2021, CIC reported a 14.27 per cent net return on its overseas investments, a reasonably solid return for a financial year embroiled in the Covid pandemic.
But even the CIC pales in comparison to the SWFs managed by China’s State Administration of Foreign Exchange (SAFE)—the official body that controls foreign reserves.
SAFE has set up three SWFs to directly invest the large sums of foreign reserves under its control—the Silk Road Fund (SAFE funds 65 per cent of the investments), the China-LAC Industrial Cooperation Investment Fund (80 per cent funding), and the China-Africa Industrial Capacity Cooperation Fund (80 per cent funding). This way, SAFE channels investments into assets in different regions of the world.
Zongyuan Zoe Liu, a fellow at the Council on Foreign Relations (CFR), has argued that SAFE has combined assets worth $1.5 trillion under the control of its SWF — making it much bigger than CIC.
The SWFs “are essential geoeconomic tools for the Communist Party of China and the Chinese state (the Party-State) to advance its strategic interests beyond China’s territorial borders without coercion,” writes Liu in her book, Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions.
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CCP control
CIC and SAFE-related funds have found a way to invest in businesses worldwide and avoid immediate scrutiny. Beijing’s SWF has reportedly poured money into private equity firms including EQT, Global Infrastructure Partners, and BC Partners to invest in Western companies.
China’s SWF increased their activity as the Donald Trump administration made it difficult for large Chinese state-owned banks to invest directly in the US.
“We stepped up our investments in private markets…continued to expand our network of high-quality managers, and deepened our co-operation with external investment partners,” said CIC’s chairman and chief executive Peng Chun in a company note.
The CCP directly appoints the heads of SWFs, and the party maintains oversight on investments pursued by the funds. The significance of SAFE’s leadership appointments can’t be emphasised enough.
Pan Gongsheng has led SAFE as the party secretary and director since 2016, rising through the ranks of state-owned banks. On 1 July, Pan was appointed as the party secretary of People’s Bank of China (PBOC), the Chinese central bank, which is a step forward in his rumoured further rise to the next chief of PBOC.
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Subtle geopolitical moves
In September 2022, through its investment in the private equity firm Global Infrastructure Partners, the CIC managed to secure a 20 per cent stake in the Melbourne Port. China’s SWFs have helped Beijing secure such strategic assets that may not otherwise be possible in the new geopolitical environment.
Investing in private equity funds offers some anonymity from appearing in indexes and investment data that Western governments can scrutinise. The private equity firms argue that Chinese investment doesn’t threaten national security because these Chinese institutions can’t hold voting rights.
But Beijing’s approach to achieving its geopolitical goals may be far more subtle. When large sums of money are involved, the Chinese SWFs could have a significant say in which assets are bought.
Governments around the world don’t have the tools to manage the risk posed by China’s SWFs, and the doors remain largely open for strategic investments by these institutions.
SWFs are increasingly important to China as the Belt and Road Initiative lending has come under scrutiny due to China’s economic slowdown, bailouts to countries struggling to repay loans, and debt sustainability. The banks and the institutions behind BRI have turned to SWFs to invest in companies and assets worldwide. Their investment into private business allows Beijing to own distressed assets and continue to seek influence worldwide.
But as the new Cold War gets going, the activities of SWFs are likely to come under scrutiny. It will be a battle royale over controlling the commanding heights of the financial world, which underlies the viability of cutting-edge technologies. By having a stake in private equity firms, Beijing can still own a piece of the high-tech pie that the US may be trying to keep away from China.
Washington’s de-risking approach may reduce some underlying risks related to investment by China’s state institutions. But with SWFs finding creative ways to increase their footprint worldwide, they may continue to fly under the radar.
Another factor working in China’s favour is that private equity firms have gained significant influence among the political elite in the Western world. ‘De-risking’ from the significant investments by SWFs will require a political courage that is likely to sour grapes on Wall Street.
The author is a columnist and a freelance journalist. He was previously a China media journalist at the BBC World Service. He is currently a MOFA Taiwan Fellow based in Taipei and tweets @aadilbrar. Views are personal.
(Edited by Theres Sudeep)