Socialism’s Trillion Dollar Chinese Characteristic w/ Zoe Liu
Socialism’s Trillion Dollar Chinese Characteristic w/ Zoe Liu
Zongyuan Zoe Liu is the Maurice R. Greenberg Senior Fellow for China Studies at the Council on Foreign Relations in New York. Her most recent book, Sovereign Funds: How the Communist Party of China Finances its Global Ambitions is an in-depth account of the emergence of China’s sovereign wealth funds and their transformative impact on global markets. Her book details China’s financial statecraft and its sovereign funds, state-owned investment funds traditionally financed by abundant natural resource exports. China’s sovereign funds, however, are curiously funded by leveraging its own foreign exchange reserves. Her other work focuses on international political economy, global financial markets, critical minerals, emerging markets, energy policy, and East Asia-Middle East relations.
Henry O’Connor: Tell me a little bit about where the idea came from to write your book. Why did you choose the title Sovereign Funds: How the Communist Party of China Finances its Global Ambition?
Zongyuan Zoe Liu: When I started at Johns Hopkins, I wanted to figure out under what circumstances countries choose to build pipelines versus acquiring tankers, but when I stumbled upon sovereign wealth funds, I became more curious as to how resource exporting countries manage their resources. I studied Norway and sovereign wealth funds in Kuwait, UAE, and Saudi Arabia. In this whole cluster, I found that China also has a sovereign wealth fund, despite being the world’s largest energy-importing country. I knew that scholars had been arguing that China has a wealth fund because of its large foreign exchange reserves, but it still didn’t make sense to me, because Japan, the second-largest foreign exchange reserve-holding country, explicitly rejected the idea of using foreign exchange reserves to establish a wealth fund. In my doctoral thesis, I did a comparative analysis of how China and Japan managed their reserves and at what junctures the Chinese government established its sovereign wealth funds. When I titled it ‘Sovereign Funds’, I was explicitly trying to show that Chinese sovereign funds are different from the conventional understanding of what a sovereign wealth fund is.
HO: How do you evaluate that decision by Japan to not start the fund? Are China’s circumstances different than that of other countries?
ZZL: Japan, while not having an explicit sovereign fund, still has government-owned investment institutions that ultimately draw their capital from foreign exchange reserves, something shared with China’s funds. I have had the opportunity to talk to some Japanese scholars and officials, and people seem to agree with me that it’s interesting to frame the Japan Bank for International Cooperation as a wealth fund. It originally was restructured from an aid agency into an investment institution using foreign exchange reserves much like China.
HO: Do you think Trump’s Sovereign Wealth Fund will be funded similarly or function in the same way as either of the Chinese or Japanese examples? Do you have a sense of its purpose?
ZZL: It will be largely dependent upon how President Trump views the fund and what kind of goal he wants the fund to achieve, as well as who manages it. Funds often have a mandate or a legal obligation to something, which is something I haven’t seen yet. In terms of the source of money, President Trump has said that tariff revenue, our natural resources, or bonds could be used to fund an American sovereign wealth fund. This might be quite a mixed source of revenue, and if it involves American government-issued bonds, might then function like the China Investment Corporation. The Chinese government also issues bonds to purchase foreign exchange reserves from the People’s Bank of China, China’s central bank. But this process involves the government basically expanding its balance sheet to take on new debt. This process is known as leveraging, which is why I called them Chinese Sovereign Leveraged Funds. They are different from the Norwegian Sovereign Fund or the Kuwaiti Investment Authority or Abu Dhabi Investment Authority, or for that matter PIF, Saudi Arabia’s Public Investment Fund. When these other funds were first created, the funding sources were purely from the monetization of natural resources.
HO: Do you think the goals of an American Sovereign Wealth Fund align with Trump’s desire to make the United States more of an export focused economy? What other sectors could it invest in?
ZZL: I’m not saying that it is impossible but just think about America’s economic structure. America’s current economy exports a great deal of services, patents, licensing, legal services, and education to the rest of the world. If the goal of the sovereign wealth fund is to boost America’s export of manufactured goods, then that would require the fund to invest in America to build more factories. But that’s not necessarily the way I think would maximize America’s economic interest simply because we have a lot of college graduates every year. Do they want to work in a factory as a blue-collar worker? Probably not. Even if the fund invests in American manufacturing, it may not necessarily achieve the desired goal of boosting manufactured goods exports. But if the fund is to invest in high tech, there are already a lot of private funds going into the technological innovation R&D space. So, I’m not exactly sure if this fund itself is necessary.
HO: I’m curious about two entities that you discussed in your book: the CIC, the Chinese Investment Corporation, and the Central Huijin. Can you expand on what those two institutions are?
ZZL: Central Huijin was created in the early 2000s, around 2003, with the goal of addressing China’s looming banking crisis. At that time, major Chinese state-owned banks were crippled by non-performing loans from state-owned sectors leftover from the legacy of the planned economy. So, to address the non-performing loans, the People’s Bank of China and the Ministry of Finance reached an agreement. While the Ministry of Finance had ownership of the banks, China had the foreign exchange reserves. So, the People’s Bank of China allocated a part of China’s foreign exchange reserves to establish Central Huijin and use it as a policy vehicle to recapitalize and save those banks. The process was so successful that the world’s largest banks are now Chinese banks. Now that its original purpose is fulfilled, Central Huijin has gone on to restructure China’s brokerage firms to recapitalize the China Development Bank too. It has played an important role in stabilizing China’s stock market over the years, and I would even call it “shareholder in chief” as it has a majority share across basically every single major Chinese financial institution, including China’s insurance companies.
The CIC, or Chinese Investment Corporation, was created in 2007 when China had accumulated foreign exchange reserves rapidly since joining the World Trade Organization in December of 2001. Unlike the Central Huijin which was created because of a looming domestic crisis, CIC was created to optimize its foreign exchange reserve management. Conventional ideas, at least at the time, said that they should invest most of their foreign exchange reserves in U.S. treasuries as a safe asset to create a buffer for balance of payment purposes. But in the context of China, people were saying well, if you invest in U.S. treasuries, then it basically misses out on other more lucrative opportunities. In this context, China was saying it could use its foreign exchange reserves to support overseas resource acquisition to meet China’s economic growth needs. In this context, the CIC was created.
Henry O’Connor is an intern at The Carter Center’s China Focus and a recent graduate of Georgia Tech.
The views expressed in this article represent those of the author(s) and not those of The Carter Center.
