China Redux

“Far, far worse things can happen than for China to come to the west bearing the chequebook it has earned by its people’s remarkable efforts.” This observation, which concludes Martin Wolf’s recent column on sovereign wealth funds (SWFs), seems rather obvious.  The real question is whether there could be anything better for the U.S. After all, China continues to buy dollars even as the value of its greenbacks falls; now the Chinese government is planning to take its excess savings – more than $200 billion worth – and invest it back into the U.S and elsewhere!  That sounds like a heck of a deal for the west to me.

Wolf and others focus on the policy problems posed by these big investment funds, which are run by cash-rich governments as diverse as China, Norway and Russia.  SWF investments certainly may raise thorny issues around corporate governance and national security, but my view is that these things will be worked out in a (mostly) sensible way.  Some deals with go through and some will not, and for good reason.

One input which has not been duly considered is that of the Chinese public, i.e. the real owner of this sovereign wealth.  What does it think should be done with the money? Does the Chinese government, and other governments for that matter, have an obligation to secure a higher rate of return? If so, what is it, and how should they go about it?

I wonder what China’s poorer denizens think about the creation of this fund, named the CIC (China Investment Corporation).  Perhaps they think the savings would be better used to invest in domestic education, health, environmental or other needs.  After all, in a Communist-run country, it would seem hard to justify chasing after an 8 percent or 14 percent or XX return while comrades are going hungry.  Of course, they hardly have a voice in the matter.

One thing is certain: China’s citizens would not likely respond well to losses incurred by the SWF.

The social and political risk China is taking in setting up the fund could hold clues as to how its plans to manage the portfolio.  Investments in Chinese businesses would be a political plus, and indeed, it appears that the CIC has already committed some funds to domestic firms.  And I wouldn’t expect anything too risky.  But that depends on the extent to which China’s wealth funds open their books.  Early indications are that portfolio holdings will not be very transparent; in such a case portfolio managers would answer to the Party, but not the public.

That, of course, would be bad news for everybody.