Oxford International Review (OIR) is a source of open discussion and engagement on the topic of SWFs. As such, we welcome and indeed seek out all views and opinions on the subject. Today, we offer the thirteenth installment of our segment: “Q&A with a SWF expert, stakeholder or policymaker” (see the Q&A archive). We are pleased to welcome Zhang Ming, Scholar at the Institute of World Economics and Politics within the Chinese Academy of Social Sciences. While Mr. Zhang’s views are his own (see our disclaimer), his perspective helps to further debate and facilitate understanding.

OIR: It is a pleasure to have you with us today, Ming. Part of what we try to do at OIR is canvass all points of view on the topic of SWFs. With this in mind, what is your reading of the internal Chinese debate on SWFs and the CIC?

Zhang Ming: Since the establishment of CIC in September 2007, there are 3 hot issues in internal debate. First, why CIC is independent from both PBOC and Ministry of Finance? This point raises two questions: Is 200 billion USD CIC’s capital or its liabilities? Why should CIC pay the interest of special government bonds? Second, why did CIC merge Central Huijin as its major subsidiary? Third, whether the poor performance of CIC in the last year is due to the fluctuations of international financial market, or due to CIC’s poor decision-making process? The people have not formed consensus about these questions yet.

OIR: That’s interesting. Based on my discussions with Western policymakers, many were also interested in understanding the CIC’s decision-making process so as to better guage its intentions. Officially, the CIC intends to achieve higher returns on foreign exchange reserves. Unofficially, do you see any scope for using the CIC to advance broader Chinese goals, such as helping domestic companies move overseas or extracting political concessions?

Zhang Ming: In my personal opinion, I think that CIC is trying to behave as a pure financial investor. However, the Central Huijin, one of CIC’s subsidiaries, is a typical strategic investor. For example, Central Huijin is the major shareholder of China Development Bank, and the latter is responsible for facilitating Chinese state-owned enterprises to do overseas investment. In the last year, China Development Bank offered a huge loan to Aluminum Corporation of China to help it to buy shares of Rio Tinto. Therefore, if Central Huijin is still the subsidiary of CIC, CIC will continue to be treated as a strategic investor by host countries.

OIR: Jamil Anderlini of the FT reported in September the State Administration of Foreign Exchange used its assets to extract political concessions from Costa Rica. What’s your reaction?

Zhang Ming: Frankly speaking, every country has been using its domestic resources, including foreign exchange reserve, to maximize its national interest. I don’t know why foreign media have paid so much attention to this issue.

OIR: Many inevitably ask about the CIC’s internal governance. Can you give us some idea as to how investment decisions are made within the CIC? What is the process, as you understand it?

Zhang Ming: There are a board of directors, a Chinese Communist Party committee, and a management team in CIC. According to the related laws and regulations about Chinese state-owned enterprises, the Party committee is responsible for ideology-related issues and will not interfere with operations. Therefore, it is the management team which forms an investment decision. Before it is implemented, the decision should be passed by the board of directors. If the scale of investment is very large or the implication of investment is very complicated, the final decision might be made by upper government, for example, the State Council. However, the above process is only based on my speculation.

OIR: By some accounts, the CIC is in enviable position since most of its capital is still sitting in cash. Given the fund has been in existence for well over a year, why is so little of its capital been invested?

Zhang Ming: I don’t think most of the asset of CIC is located in cash. One third of 200 bn USD was used to purchase Central Huijin. Another 20 bn was injected into China Development Bank. As for the rest, most of them have been invested in US government bonds, money market funds, etc. Why is so little of its capital been invested? The historic performance of CIC was so bad, and now the market is so volatile. Due to the uncertainties and the pressure from upper government, CIC is very cautious in making new investment decisions, maybe over cautious.

OIR: What has the reaction in China been to the Santiago Principles? Do you see the CIC fully implementing them? How about SAFE?

Zhang Ming: At first, CIC did not actively participate in the establishment of good practice for SWF. However, CIC had changed its attitude toward global governance of SWF, and we saw that CIC had joined the making of the Santiago Principles. I think that CIC will try to implement them to improve its overseas investment environment and to gain the trust of host countries. SAFE does not think that it is a SWF, therefore SAFE will not implement the Principles.

OIR: Thanks, Ming. Very interesting insights.