{"id":13561,"date":"2024-01-26T06:30:31","date_gmt":"2024-01-26T06:30:31","guid":{"rendered":"https:\/\/focus.cbbc.org\/?p=13561"},"modified":"2025-04-23T09:03:25","modified_gmt":"2025-04-23T09:03:25","slug":"how-is-china-financing-its-global-ambitions","status":"publish","type":"post","link":"https:\/\/focus.cbbc.org\/how-is-china-financing-its-global-ambitions\/","title":{"rendered":"How is China Financing Its Global Ambitions?"},"content":{"rendered":"<p>Zongyuan Zoe Liu has opted to tackle a big and very important subject in her new book, <em>Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions<\/em> (Harvard University Press). Liu is a Morris R. Greenberg fellow for China studies at the Council on Foreign Relations (CFR) in New York. China\u2019s sovereign wealth fund is interesting and vital to the rise of China\u2019s economy, as it has both grown significantly in recent decades and is deployed on behalf of the state in line with its political objectives.<\/p>\n<p>Whether you\u2019re trying to understand how China invests and lends overseas or finances large capital projects (that British firms may well be bidding on), figuring out the objectives of the national sovereign wealth fund is important.<\/p>\n<p><a href=\"\/lp-cta-gateway\" target=\"_blank\" rel=\"noopener\"><img decoding=\"async\" class=\"aligncenter wp-image-7246 size-full\" src=\"https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-gateway.png\" alt=\"launchpad gateway\" width=\"4680\" height=\"786\" srcset=\"https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-gateway.png 4680w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-gateway-300x50.png 300w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-gateway-1024x172.png 1024w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-gateway-768x129.png 768w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-gateway-1536x258.png 1536w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-gateway-2048x344.png 2048w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-gateway-1920x322.png 1920w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-gateway-1170x197.png 1170w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-gateway-585x98.png 585w\" sizes=\"(max-width: 4680px) 100vw, 4680px\" \/><\/a><\/p>\n<h4>Can you give us an idea of the size and relative power of China\u2019s current sovereign wealth fund?<\/h4>\n<p>I refer to China\u2019s sovereign funds as sovereign leveraged funds as their ultimate source of capital differs from commodity-based sovereign wealth funds. China is home to one of the world\u2019s largest sovereign funds, China Investment Corporation. CIC\u2019s total assets under management reached about $1.24 trillion at the end of 2022, bigger than Saudi Arabia\u2019s 2022 GDP (about $1.1 trillion). Saudi Arabia was the 17<sup>th<\/sup> largest economy in the world in 2022.<\/p>\n<p>Besides CIC, China also has a number of sovereign funds capitalised and owned by the State Administration of Foreign Exchange (known as SAFE). SAFE is the foreign exchange reserves management arm of the People\u2019s Bank of China, the central bank. SAFE does not publish the total assets under management of its various investment funds. Conservatively, I estimate the value to be at least $1 trillion &#8211; $1.5 trillion.<\/p>\n<p>It is worth noting that the foreign exchange assets managed by CIC and SAFE-affiliated investment funds are not counted towards China\u2019s official foreign exchange reserves, which now stand at $3.24 trillion.<\/p>\n<div style=\"clear:both; margin-top:2em; margin-bottom:2em;\"><a href=\"https:\/\/focus.cbbc.org\/eight-charts-that-explain-the-chinese-economy-in-2023\/\" target=\"_self\" rel=\"dofollow\" class=\"u6ee5104d8ff9a58df4e82b075231778a\"><style> .u6ee5104d8ff9a58df4e82b075231778a { padding:0px; margin: 0; padding-top:1em!important; padding-bottom:1em!important; width:100%; display: block; font-weight:bold; background-color:#eaeaea; border:0!important; border-left:4px solid #E74C3C!important; box-shadow: 0 1px 2px rgba(0, 0, 0, 0.17); -moz-box-shadow: 0 1px 2px rgba(0, 0, 0, 0.17); -o-box-shadow: 0 1px 2px rgba(0, 0, 0, 0.17); -webkit-box-shadow: 0 1px 2px rgba(0, 0, 0, 0.17); text-decoration:none; } .u6ee5104d8ff9a58df4e82b075231778a:active, .u6ee5104d8ff9a58df4e82b075231778a:hover { opacity: 1; transition: opacity 250ms; webkit-transition: opacity 250ms; text-decoration:none; } .u6ee5104d8ff9a58df4e82b075231778a { transition: background-color 250ms; webkit-transition: background-color 250ms; opacity: 1; transition: opacity 250ms; webkit-transition: opacity 250ms; } .u6ee5104d8ff9a58df4e82b075231778a .ctaText { font-weight:bold; color:#E74C3C; text-decoration:none; font-size: 16px; } .u6ee5104d8ff9a58df4e82b075231778a .postTitle { color:#000000; text-decoration: underline!important; font-size: 16px; } .u6ee5104d8ff9a58df4e82b075231778a:hover .postTitle { text-decoration: underline!important; } <\/style><div style=\"padding-left:1em; padding-right:1em;\"><span class=\"ctaText\">Read Also<\/span>&nbsp; <span class=\"postTitle\">Eight charts that explain the Chinese economy in 2023<\/span><\/div><\/a><\/div>\n<h4>You analyse China\u2019s sovereign funds by following a research principle: follow the money, find the politics. Can you tell us broadly what politics you find when you follow the money?<\/h4>\n<p>First, most Chinese sovereign funds were not established with explicit geo-economic motivations, nor were they initially created as platforms for global power projections. Crises at home and abroad have shaped and expedited the party-state\u2019s policy changes from focusing on the accumulation of foreign exchange reserves to considering reserve diversification and investment in strategic assets.<\/p>\n<p>Initially, the decision to use China\u2019s FX reserves to create sovereign funds was motivated by domestic considerations rather than by an intention to weaponize China\u2019s FX reserves. These domestic considerations include improving China\u2019s financial security, securing strategic overseas assets, and ultimately supporting China\u2019s development.<\/p>\n<p>For the last two decades, China\u2019s sovereign funds have played a significant role in the Chinese economy, mitigating financial crises and tempering exogenous shocks. They have supported China\u2019s industrial policies by financing the state\u2019s procurement of strategic overseas assets, bankrolling Chinese enterprises\u2019 mergers and acquisitions abroad, and sponsoring the development of indigenous Chinese technology startups. As China\u2019s state-owned capital has gone global, the scope of China\u2019s geo-economic influence has duly expanded.<\/p>\n<p>Second, the ascendance of Xi Jinping to the party\u2019s top leadership position in 2012 and the rollout of the Belt and Road Initiative (BRI)\u00a0have motivated the party to leverage China\u2019s FX reserves as strategic financial power to advance China\u2019s overseas interests. Since 2013, the party has used FX reserves to replenish China\u2019s policy banks and to establish several new sovereign funds, such as the Silk Road Fund, China-Latin America Production Capacity Cooperation Investment Fund, China-Africa Industrial Capacity Cooperation Fund, and CNIC Corporation.<\/p>\n<p>Last but not least, the evolution of the landscape of sovereign leveraged funds in China has been a process of bureaucratic competition. For example, when China Investment Corporation was launched in 2017, its board was composed of representatives from rival government agencies, including the Ministry of Finance, the National Council for Social Security Fund, the China Securities Regulatory Commission, the Ministry of Commerce, and the People\u2019s Bank of China and its subsidiary State Administration of Foreign Exchange. This complex composition means that the strategic decision-making of the board could resemble a political proxy battle between them as the young CIC tried to form its own identity. CIC\u2019s initial capitalization using China\u2019s FX reserves also publicly challenged the SAFE\u2019s long-established role as the only legal administrator of China\u2019s FX reserves. As the size of China\u2019s FX reserves grew, the PBoC and SAFE responded to these challenges posed by CIC. The SAFE has moved beyond its traditional conservative reserve management approach and has adopted unconventional and aggressive diversification strategies, deploying China\u2019s FX reserves to finance the realization of the party\u2019s ambitions in global markets.<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-13565 size-full\" src=\"https:\/\/focus.cbbc.org\/wp-content\/uploads\/2024\/01\/Sovereign-Funds-cover.jpg\" alt=\"\" width=\"600\" height=\"906\" srcset=\"https:\/\/focus.cbbc.org\/wp-content\/uploads\/2024\/01\/Sovereign-Funds-cover.jpg 600w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2024\/01\/Sovereign-Funds-cover-199x300.jpg 199w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2024\/01\/Sovereign-Funds-cover-585x883.jpg 585w\" sizes=\"(max-width: 600px) 100vw, 600px\" \/><\/p>\n<h4>You also argue that China\u2019s sovereign funds are unlike commodity-based SWFs in other countries, and so represent an entirely new class, which you term sovereign leveraged funds. Can you explain the difference between the more traditional SWFs and these Chinese SLFs? How does the Chinese state raise capital for its sovereign leveraged funds, and how does this differ from elsewhere?<\/h4>\n<p>Unlike traditional commodity-based SWFs, China\u2019s approaches to leveraging its FX reserves to create sovereign funds do not rely upon natural resource revenues. China\u2019s experience with sovereign funds demonstrates that a state without significant natural resource revenues can take on explicit or implicit leverage to source the seed capital for the founding of what I call sovereign leveraged funds (SLFs). SLFs are a political-economic innovation because they are the product of the state leveraging its financial and political resources, explicitly or implicitly, to make it possible to capitalize a fund without relying upon a high-profit revenue stream such as commodities exports.<\/p>\n<p>Explicit leverage means issuing debt and using the proceeds to capitalize SLFs. This process involves expanding the state\u2019s balance sheet and allowing the government to raise new capital from designated institutions or private markets, to add it to the existing stock of available capital, and to deploy the combined lot via a SLF as investments in risky assets. How the debts are structured and raised, who provides the debt proceeds, and who controls the newly established funds are not only financial issues but also political issues. In other words, the decisions about how the newly issued debt will be underwritten and who will ultimately control the resultant SLF are the product of intensive political negotiation and aggressive bureaucratic competition.\u00a0The creation of China Investment Corporation (CIC) illustrates the explicit use of leverage over China\u2019s FX reserves. The Ministry of Finance (MoF) issued RMB1.55 trillion special purpose bonds and used the bond proceeds to purchase $200 billion FX reserves from the People\u2019s Bank of China (PBoC) and then to capitalize CIC.<\/p>\n<p>An alternative approach for the state to obtain investment capital is to use implicit leverage to convert existing pools of low-risk capital, or state-owned assets like FX reserves, into high-risk-bearing capital that is subsequently transferred to the management of the SLF. How this process constitutes an increase in the state\u2019s financial leverage can be understood by considering the typical investment made by a SLF. In general, the fund uses its capital to make an equity investment in a target company that is itself internally leveraged\u2014that is, it carries debt on its own balance sheet. The sovereign fund\u2019s equity interest is subordinate to the debt of the target company. The state is implicitly leveraged because the debt of the company is not on the balance sheet of the state, but the state still bears the risk of losing its entire equity stake if the company\u2019s debt cannot be repaid. In other words, the leverage is external to the state\u2019s balance sheet. In this way, the state does not issue any new debt or expand its balance sheet, but it still increases its financial leverage. Both Central Huijin and SAFE-affiliated investment companies serve as examples of how the state takes on implicit leverage and then how political conflict ensues.<\/p>\n<p>Economically, the use of either explicit or implicit leverage over FX reserves decreases the stock of FX assets that can be counted toward FX reserves as defined by the IMF. The most important distinction between the two approaches is the accounting treatment and awareness of its existence among the general public. Regardless of which type of leverage the state chooses when raising capital, the political outcome is the same: it will inevitably precipitate political conflict among those who aspire to control the resultant capital. Implicit leverage is usually a more politically expedient choice because the associated liabilities usually are not recorded in the official accounts.<\/p>\n<div style=\"clear:both; margin-top:2em; margin-bottom:2em;\"><a href=\"https:\/\/focus.cbbc.org\/how-a-chinese-ev-brand-overtook-tesla\/\" target=\"_self\" rel=\"dofollow\" class=\"ua34ece741375890a46edc194a11cc559\"><style> .ua34ece741375890a46edc194a11cc559 { padding:0px; margin: 0; padding-top:1em!important; padding-bottom:1em!important; width:100%; display: block; font-weight:bold; background-color:#eaeaea; border:0!important; border-left:4px solid #E74C3C!important; box-shadow: 0 1px 2px rgba(0, 0, 0, 0.17); -moz-box-shadow: 0 1px 2px rgba(0, 0, 0, 0.17); -o-box-shadow: 0 1px 2px rgba(0, 0, 0, 0.17); -webkit-box-shadow: 0 1px 2px rgba(0, 0, 0, 0.17); text-decoration:none; } .ua34ece741375890a46edc194a11cc559:active, .ua34ece741375890a46edc194a11cc559:hover { opacity: 1; transition: opacity 250ms; webkit-transition: opacity 250ms; text-decoration:none; } .ua34ece741375890a46edc194a11cc559 { transition: background-color 250ms; webkit-transition: background-color 250ms; opacity: 1; transition: opacity 250ms; webkit-transition: opacity 250ms; } .ua34ece741375890a46edc194a11cc559 .ctaText { font-weight:bold; color:#E74C3C; text-decoration:none; font-size: 16px; } .ua34ece741375890a46edc194a11cc559 .postTitle { color:#000000; text-decoration: underline!important; font-size: 16px; } .ua34ece741375890a46edc194a11cc559:hover .postTitle { text-decoration: underline!important; } <\/style><div style=\"padding-left:1em; padding-right:1em;\"><span class=\"ctaText\">Read Also<\/span>&nbsp; <span class=\"postTitle\">How a Chinese EV brand overtook Tesla<\/span><\/div><\/a><\/div>\n<h4>Can you give us some examples of what China does with its sovereign leveraged funds that affects the economy?<\/h4>\n<p>For the last two decades, China\u2019s sovereign funds have played a significant role in the Chinese economy, mitigating financial crises and tempering exogenous shocks. They have supported China\u2019s industrial policies by financing the state\u2019s procurement of strategic overseas assets, bankrolling Chinese enterprises\u2019 mergers and acquisitions abroad, and sponsoring the development of indigenous Chinese technology startups. China\u2019s sovereign funds were also sponsors and investors in China\u2019s first semiconductor investment fund. They have also been used to capitalise China\u2019s policy banks, such as the China Development Bank and Exim Bank of China. Through SAFE-Co-Financing, China\u2019s foreign exchange reserves are loaned to support Chinese firms\u2019 overseas investment in strategic assets, such as mineral resources.<\/p>\n<p>Under President Xi, the party-state has gradually expanded the SLF model, applying it to reform state-owned enterprises (SOEs) so as to update the state\u2019s industrial policy. In November\u202f2013, President Xi laid out his vision for China\u2019s economy for the first time and called for creating \u201cstate-owned capital investment companies\u201d to invest in \u201ckey industries and fields that are vital to national security and are the lifeline of the national economy.\u201d In effect, Xi\u2019s proposed state-owned capital investment companies are SLFs mandated to focus on financing development in state-prioritised strategic industries, such as civil aviation, energy and mineral resources, nuclear power, and global shipping and logistics.<\/p>\n<p>Xi\u2019s prioritisation of capital management in China\u2019s economic reform \u2013 and his use of SLFs as a tool to accomplish this \u2013 is not a complete departure from the path of his predecessors. Instead, it reflects the enduring influence on China\u2019s economic policymaking of the dual successes of Central Huijin in stabilising China\u2019s financial system and CIC\u2019s expansion into global financial markets. For Xi\u2019s generation of Chinese Communist Party leadership, the SLFs model provides a ready playbook for expanding the influence of the party-State both at home and abroad.<\/p>\n<div style=\"clear:both; margin-top:2em; margin-bottom:2em;\"><a href=\"https:\/\/focus.cbbc.org\/read-cbbcs-annual-report-2022-2023\/\" target=\"_self\" rel=\"dofollow\" class=\"uf5c238799959440da5a3b21cd349bac8\"><style> .uf5c238799959440da5a3b21cd349bac8 { padding:0px; margin: 0; padding-top:1em!important; padding-bottom:1em!important; width:100%; display: block; font-weight:bold; background-color:#eaeaea; border:0!important; border-left:4px solid #E74C3C!important; box-shadow: 0 1px 2px rgba(0, 0, 0, 0.17); -moz-box-shadow: 0 1px 2px rgba(0, 0, 0, 0.17); -o-box-shadow: 0 1px 2px rgba(0, 0, 0, 0.17); -webkit-box-shadow: 0 1px 2px rgba(0, 0, 0, 0.17); text-decoration:none; } .uf5c238799959440da5a3b21cd349bac8:active, .uf5c238799959440da5a3b21cd349bac8:hover { opacity: 1; transition: opacity 250ms; webkit-transition: opacity 250ms; text-decoration:none; } .uf5c238799959440da5a3b21cd349bac8 { transition: background-color 250ms; webkit-transition: background-color 250ms; opacity: 1; transition: opacity 250ms; webkit-transition: opacity 250ms; } .uf5c238799959440da5a3b21cd349bac8 .ctaText { font-weight:bold; color:#E74C3C; text-decoration:none; font-size: 16px; } .uf5c238799959440da5a3b21cd349bac8 .postTitle { color:#000000; text-decoration: underline!important; font-size: 16px; } .uf5c238799959440da5a3b21cd349bac8:hover .postTitle { text-decoration: underline!important; } <\/style><div style=\"padding-left:1em; padding-right:1em;\"><span class=\"ctaText\">Read Also<\/span>&nbsp; <span class=\"postTitle\">Read CBBC's Annual Report 2022-2023<\/span><\/div><\/a><\/div>\n<h4>How has Covid-19 and the apparent economic slowdown in China affected China\u2019s sovereign leveraged funds in the last couple of years, and what prospects do you see going forward?<\/h4>\n<p>Some of China\u2019s sovereign leveraged funds suffered losses during the Covid-19 pandemic, the same as many other sovereign funds in the world. For example, CIC\u2019s total assets under managed decreased from around $1.35 trillion in 2021 to $1.24 trillion in 2022. As a result, it lost the title of the world\u2019s largest sovereign fund to the Government Pension Fund of Norway. Nonetheless, China\u2019s sovereign leveraged funds have become a reliable source of arsenal for the Chinese government to deploy and address acute domestic economic challenges. As the Chinese economy struggled to recover in 2023, Central Huijin was deployed once again to boost China\u2019s stock market.<\/p>\n<p>The West\u2019s investment screening has arguably had a more consequential impact on the global investment strategy of China\u2019s sovereign leveraged funds. These funds have evolved and changed their strategies in response to increasingly stringent FDI screening by Western governments. Since 2017, CIC and other Chinese sovereign funds have entered into more partnerships with leading institutional investors in Western countries and have launched several bilateral cooperation investment funds. They have become innovative in establishing partnerships and structuring deals in ways that are more likely to pass regulatory scrutiny so as to invest in strategic assets that would be nearly impossible to obtain.<\/p>\n<p><a href=\"\/lp-cta-membership1\" target=\"_blank\" rel=\"noopener\"><img decoding=\"async\" class=\"aligncenter wp-image-7248 size-full\" src=\"https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-membership1.png\" alt=\"\" width=\"4680\" height=\"786\" srcset=\"https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-membership1.png 4680w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-membership1-300x50.png 300w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-membership1-1024x172.png 1024w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-membership1-768x129.png 768w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-membership1-1536x258.png 1536w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-membership1-2048x344.png 2048w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-membership1-1920x322.png 1920w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-membership1-1170x197.png 1170w, https:\/\/focus.cbbc.org\/wp-content\/uploads\/2021\/03\/lp-membership1-585x98.png 585w\" sizes=\"(max-width: 4680px) 100vw, 4680px\" \/><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Zongyuan Zoe Liu has opted to tackle a big and very important subject in her new book, Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions (Harvard University Press). Liu is a Morris R. Greenberg fellow for China studies at the Council on Foreign Relations (CFR) in New York. China\u2019s sovereign wealth fund is interesting and vital to the rise of China\u2019s economy, as it has both&hellip;<\/p>\n","protected":false},"author":34,"featured_media":13564,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[132],"tags":[2427],"class_list":["post-13561","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-news","tag-paywall"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.8 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>How is China Financing Its Global Ambitions? - Focus - China Britain Business Council<\/title>\n<meta name=\"description\" content=\"Paul French talks to Zoe Liu \u2013 author of a new book on China&#039;s sovereign wealth fund \u2013 about how the country manages its money\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/focus.cbbc.org\/how-is-china-financing-its-global-ambitions\/\" \/>\n<meta property=\"og:locale\" content=\"en_GB\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"How is China Financing Its Global Ambitions? 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