Beijing defends sovereign funds

Today of course the objective of Beijing to deploy SWF is purely economic - investment in China and acquire strategic resources outside China for the purpose of China. (and at the same time earn better returns on the $1500bn of reserves. But the worry of others (not just west), and a justified concern, is that few years down the line nothing stops Beijing in using these funds for political arm twisting and or even may be destabilising a country's markets. If Beijing wants to earn credibility (which it better do given the size of its reserves), it needs to bring in more transparency, hand over management of small funds to professional fund houses. Beijing and the petro dollar funds need to follow the route of Temasek (which is more professionally managed and transparent).

By Mure Dickie in Beijing

Published: January 7 2008 19:41 | Last updated: January 7 2008 19:41

The developed world should not discriminate against sovereign wealth funds from developing countries or subject them to “financial protectionism”, according to a senior Chinese official.

Comments by Wei Benhua, deputy head of China’s State Administration of Foreign Exchange, reflect Beijing’s concern about international reaction to China’s attemptsto generate better returns from its bulging foreign exchange reserves.

Critics have suggested the rise of sovereign wealth funds such as Beijing’s $200bn China Investment Corp (CIC) may give their opaque state masters unprecedented influence over other countries’ commercial assets.

But writing in China Business News yesterday, Mr Wei characterised such worries as baseless: “The China Investment Corp drew the attention of international society as soon as it was established, with certain countries intentionally disseminating the view of Chinese investment as a threat,” he wrote.

Sovereign wealth funds would benefit international markets by increasing liquidity and by making global resource allocation more efficient, Mr Wei said.

“There should be no discrimination in the treatment of sovereign wealth funds; the funds of developing and developed countries should be treated the same way. International society should clearly oppose investment protectionism and financial protectionism in any form.” China should get “actively involved” in discussions about rules, Mr Wei wrote.The International Monetary Fund is to devise a code for sovereign funds. The Organisation for Economic Co-operation and Development is at work on guidelines for investment recipients.

The comments by a top official at Safe suggest the foreign exchange regulator is determined to play a wider role in China’s push to boost returns from its nearly $1,500bn in forex reserves, despite formation of the independent CIC.

Mr Wei did not refer to Safe’s own low-profile international equity investment. The FT reported last week a secretive Hong Kong-based subsidiary of the administration had bought stakes in three of Australia’s largest banks.

Mr Wei wrote sovereign funds should “maintain a high level of information disclosure, and strengthen transparency”, although he added that risk of market instability would limit disclosure by new funds.

Political worries sank a 2005 bid by CNOOC, China’s third-ranked oil group, for American company Unocal. Recently there was concernat Chinese involvement in a takeover of 3Com, a US telecommunications company, by a consortium led by Bain Capital, the US private equity group.

Michael Pettis, professor of finance at Peking University’s Guanghua School of Management, said some observers seemed “overly worried” about influence of sovereign funds such as CIC, with its initial capital of $200bn of which only $70bn is for overseas purchases. “They are not really that big,” he said.

Copyright The Financial Times Limited 2008