SAFE, State Capitalist?

One of the questions raised by the expansion of sovereign wealth funds – back when sovereign funds were growing rapidly on the back of high oil prices and Asian countries’ increased willingness to take risks with the reserves – was whether sovereign funds should best be understood as a special breed of private investors motivated by (financial) returns or as policy instruments that could be used to serve a broader set of state goals. Like promoting economic development in their home country by linking their investments abroad to foreign companies investment in their home country. Or promoting (and perhaps subsidizing) the outward expansion of their home countries’ firms.

Perhaps that debate should be extended to reserve managers?

Jamil Anderlini of the FT reports that China now intends to use its reserves to support the outward expansion of Chinese firms. Anderlini:

Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday. “We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises,” he told Chinese diplomats late on Monday.

A number of countries have used their reserves to bailout key domestic firms – and banks – facing difficulties repaying their external debts. Fair enough. It makes sense to finance bailouts with assets rather than debt if you have a lot of assets.

But China is going a bit beyond using its reserves to bailout troubled firms. It is trying to help its state firms expand abroad The CIC has invested in the Hong Kong shares of Chinese firms, helping them raise funds abroad (in some sense). And now China looks set to use SAFE’s huge pool of foreign assets to support Chinese firms’ outward investment.

That of course is China’s right.* China clearly has more reserves than it really needs, and thus can take some risks with its reserves.

But it also has consequences. If Chinese firms are explicitly backed by China;s reserves, it gets harder to argue that their expansion reflects a purely commercial calculus. China’s government presumably will deploy its assets to pursue China’s strategic as well as its commercial goals.

In some sense it is surprising that China has decided to be so explicit about its new desire to use its reserves to support Chinese state firms. China’s government could have achieved the same result by quietly putting more foreign currency on deposit in the state banks, and having the state banks lend those funds out to firms looking to expand abroad. See Richard McGregor’s account of how Chinalco financed its initial purchase of Rio Tinto shares.

China’s announcement presumably was directed at a domestic audience – one that is increasingly uncomfortable with China’s growing exposure to the dollar, and one that wants China to use its foreign assets in ways that more obviously help China’s own citizens.

It nonetheless highlights that the state plays a larger role in the economy of the world’s leading creditor nation than in most of the economies that it is investing in. Even now, after the crisis. And China’s state plays an even bigger role in China’s outward investment than in China’s domestic economy. Thanks to China’s exchange rate regime, China’s state has a de facto monopoly on outward capital flows from China.

Creditor countries often end up exporting their own economic model. Or at least trying too.

China may be no different.

And the growing reach of China’s state capitalists, in turn, might end up changing corporate America’s view of China.

* China isn’t alone in using its reserves to support local firms.


Originally published at Council on Foreign Relations Blog and reproduced here with the author’s permission.