Sovereign Investing in Times of Crisis: Global Regulation of Sovereign Wealth Funds, State Owned Enterprises and the Chinese Experience--Part I, Intro

This is the FIRST of a multi-part series exploring the rise of a new form of integrated sovereign investing. The focus will be on the regulatory framework that is being developed in the West and the reality of innovative sovereign investing being implemented in China. A complete version of these materials will be published in the University of Iowa College of Law, the full manuscript of which may be accessed HERE.

The materials will be divided into the following parts:

Part I. Introduction

Part II. Projections of Public Economic Power in Private Form: Contextualizing Sovereign Wealth Funds--Form, Function and Policy.
A. Form in SWF Definition and Operation.
B. Function in Sovereign Investing.
C. Form and Function in the Policy Context on the Eve of Financial Crisis.

Part III. Complexity and Coordination in Sovereign Investing: The State Owned Enterprise as Sovereign Investment Vehicle.

Part IV. The Expression of Dissonance in Regulatory Responses.
A. National Approaches to Regulatory Reform.
1. The United States, Canada, Australia
2. Europe
B. Proposed Non-National Approaches to Regulatory Reform.
1. The European Union
2. American Bi-Lateralism
3. Santiago Principles.
4. OECD Soft Standard Setting

Part V. Coordination, Development, Opposition and the Challenges of Sovereign Investing in the Context of Global Economic Crisis: The Case of China.
A. “Go Global” Strategy and the Consolidation of Sovereign Investment
B. The Organization and Operation of Chinese Sovereign Investing.
C. Sovereign Investment as Cooperative Public-Private Networks: CIC and Its Subsidiaries.
D. Conformity to Current Regulatory Models and Policy Ramifications.

Part VI. Conclusion.




Sovereign Investing in Times of Crisis: Global Regulation of Sovereign Wealth Funds, State Owned Enterprises and the Chinese Experience

Abstract: The financial crisis of 2007 has brought into sharper focus a set of rising global financial actor—the sovereign investor. In the form of sovereign wealth funds (SWFs), sovereigns have become an important player in global financial markets and its stability. Over the last decade they have become more visible and more aggressive in the scope and form of their interventions in global finance. In the form of state owned enterprises, sovereigns have begun to operate indirectly through subordinate legal persons that operate like privately held multinational corporations. In that form, sovereigns are becoming a more significant presence in global markets as owners as well as investors. More importantly, sovereign owners have begun to coordinate their economic activities for economic and sovereign goals. Consequentially, crisis has produced a dynamic element in the evolution of the global economic system. These evolutionary elements now brought into sharper focus issues of law and policy that stretch current systemic conceptions into new and unchartered territory. If sovereign investors are understood as private actors participating in markets, then this might suggest the best case for the equal treatment of states with private entities, because it stands in the same shoes as a private investor. On the other hand, if sovereign investors, and their instrumentalities, are understood as an instrumentality of the state, then these entities can be understood as instruments projecting state power into the territory of other states, and a political solution becomes more likely. Yet, while governmental responses were at first wary—criticizing these funds as potentially dangerous to the sovereignty and independence of national markets, the increasing needs of national economic sectors quickly altered attitudes. Responses have focused on law and policy to protect the integrity and workings of the markets themselves—both domestically and internationally—by decentering the sovereign element of sovereign investment, but without much of a plausible conceptual center. This essay examines these fundamental issues of sovereign investing. Section I contextualizes the problem as a function of the character and control of large aggregations of wealth, Section II focuses on sovereign wealth funds as projections of public economic power in private form. It focuses on issues of the conceptual dissonance in the definition and operation of sovereign wealth funds. The section ends by connecting those issues to policy debates about sovereign investing, especially in the form of sovereign wealth fund activity. Section III then considers the expression of the conceptual dissonance of sovereign investment regulation. It considers national and supra national approaches to regulation and regulatory reform. Section IV considers state owned enterprises as another vehicle for sovereign investment abroad. It considers state owned enterprises (SOEs) as a fundamental component of innovative multi-vehicle deployments of sovereign wealth outside the national territory as part of the implementation of coordinated national development goals. Section V critically examines these issues in context. It considers the approach of China in the use of its state wealth through SWFs and SOEs. The Chinese efforts to coordinate sovereign investing directly by the China Investment Corporation and its principal subsidiaries, and indirectly through its subsidiaries and supported SOEs investing abroad, suggest a more complex organization of sovereign investing in which profit maximization is blended with a pronounced set of political objectives, grounded in development goals. This presents a potentially substantial advance in the integration of programs of sovereign investing, public policy and private markets. A responsive regulatory framework has not followed. The rise of sovereign market participatory entities, operating as both sovereign and private actors, will require a responsive regulatory framework substantially different from those currently in gestation. The Chinese experience suggests that while there is fundamentally little to fear from well operating public-private constructs, that model requires a different regulatory approach, and one that recognizes and rethinks the relationship of public and private sectors and the limitations of the state’s role in both in the context of protecting the integrity of global markets and the free movement of capital and economic activity.

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“We plant everything.”2

I. INTRODUCTION

A century ago the guardians of public power in the United States articulated a widely held fear of private aggregations of power. That fear was pointed outward, to the community of individual actors, as well as inward to the authority and effectiveness of the public power itself. It suggested the nature of the threat as not merely economic, but also conceptual--large corporate aggregations threatened the hierarchy of legal authority in which the state and its apparatus stood at the very top as the only legitimate source of public regulation, and everything else occupied the space reserved for the objects of that regulation. "Through size, corporations, once merely an efficient tool employed by individuals in the conduct of private business have become an institution--an institution which has brought such concentration of economic power that so-called private corporations are sometimes able to dominate the state."3 The fear, thus well articulated, was grounded in a set of simple world-order conceptions in which regulation was understood to be memorialized in law derived from public bodies legitimately vested with authority to command every member of the community it controlled.4 One worried about hierarchies of public regulatory regimes,5 or the unruliness of customary law in a new rational and “scientific” age.6 This was the classical age of Rechtsstaat.7 Beyond the state, there was little that was legitimate in the political sphere. Everything else might be coercive, but it was not public (a matter affecting the governance of the community)--from the compulsion of religious behavior codes to the limited agreements memorialized in contracts between finite parties covering very limited set of behaviors. And even these might be regulated by the state.8 Because, above the state there could be nothing, all was subject to and flowed from, the only legitimate source of public regulatory power.9 But large corporate organizations threatened that order--and the authority of the state--asserted by states through its military and articulated through its officials.

A generation ago the guardians of public power on a global stage continue to articulate the same widely held fear--but now threatening all states. In the form of multinational corporations, the belief has grown that large aggregations of private power can overwhelm the more limited and territorially based public power, especially (but not exclusively) of small states.10 These entities might subvert not only the traditional order hierarchy represented by the state, but might well subvert the global monopoly of power represented in the public power through the erection of supra-national systems of public actors. And not economic entities alone threaten monopolies of power whose borders are protected by the conceptual division of law into public and private spheres. The growth of transnational civil society actors, and their incorporation within the rising international system suggests that the patterns of change share some unifying characteristics.11 One response has been to attempt to domesticate these sources of private transnational power to an aggregate morality of public power expressed at the international level and transposed into the law of all public actors. The U.N.'s Global Compact project12 represents one attempt to operationalize such a system.13 The Organization for Economic Cooperation and Development (OECD)14 Guidelines for Multinational Enterprises system represents another. The alternative, and less well accepted response, at least within the community of public actors, has been based on a willingness to acknowledge the public power of these private institutions and to bring them within the regulatory framework that binds other public actors.15

Still, the subversion of the classical notion of the public order, when that subversion can be effected to the advantage of the primi inter pares16 of the global state community, might still be a tempting alternative. And so today, the guardians of public power have succumbed to the lessons of a century. If the old field boundaries are ineffective in preserving local or global monopolies of public power, then those monopolies must adjust to fit themselves to the newer realities. So states have now sought to extend their market share in all markets for power. No longer content to wield the traditional (and traditionally limited) forms of public power, the state now serves as a major player in markets for economic power. This participation is not merely in the old and now fairly tame form of ownership of traditionally constituted state enterprises--mercantilist/Marxist-Leninist undertakings with a long and well understood history and purpose.17

The 21st Century saw a dramatic rise in the willingness of states to project economic power both at home and in host states through these vehicles. The facilitating cause is the creation of the very system that frees economic actors from the constraints of territory and more closely binds public actors thereto.18 States have become, to some extent, pools of national wealth potentially as great as the financial strength of a state, used for the purpose of investing in and through private markets. In the form of sovereign wealth funds,19 and the investment activities of reconstituted state owned enterprises,20 the state is now becoming the very thing that, a century ago it feared most as an internal threat to its authority. Now over a generation old in its current form, financial entities identified as sovereign wealth funds have become important factors in global financial stability.21 Starting slowly after the Second World War, sovereign wealth funds have become a major player in financial markets.22 Over the last decade they have become more visible and more aggressive in the scope and form of their interventions in global finance.23 The rise of these sovereign vehicles reflects the regimes of free movements of capital and the opening of national territories to inbound foreign investment that gained momentum after 1980. It also reflects the close connection between the financial activities of states and the legal regimes that produced a very limited view of the range of permissible forms these activities could be understood, and so understood, regulated. This connection is important. It is not only descriptive—suggesting origins, but also normative, suggesting a framework for conceptualization that has significant legal effect. In the case of sovereign wealth funds, it serves as the basis for treating the fund as a sovereign vehicle (and thus subject to tax and sovereign immunity treatment on that basis) rather than as an investment fund, the owner of which is a sovereign (and thus subject to tax treatment as a private entity and no sovereign immunity to it).24

But sovereign investing abroad is not limited to or accomplished solely through SWFs. Newly reconceived, and not merely the corporate expressions of public control economic activity, State owned enterprises now can function like privately held enterprises in virtually all respects. Still, in the case of SOE activities abroad, they serve as a basis for privatizing the sovereign activities of states through surrogates that function like other private actors but whose shareholders do not behave like individual or corporate shareholders. Like SWFs, SOEs have begun to invest in economic markets abroad. More importantly, unlike sovereign wealth funds, whose activities do not generally seek controlling interests in investment targets, SOE investments may more often have as their object the acquisition of control of a private economic entity operating or based abroad. That has raised some significant concerns that have flowed from SOE interventions in foreign economies to the activities of SWFs.25

Developing states continue to innovate the form, function and activities of SWFs and SOEs.26 Developing states have also begun to coordinate the activities of its sovereign investment and economic operations vehicles for the purpose of aiding national development efforts.27 Especially potent is the coordinated deployment of SWF and SOE investment activities abroad, targeting investment that maximizes the economic and sovereign aims of their owner. These innovations were brought into sharp focus in the course of events leading up to the acknowledged collapse of the global economic system after September 2008.28 One of the most dramatic events of the financial crisis was the rescue of several American financial institutions by foreign sovereigns willing to invest in those institutions.29 Those investments were accomplished through a variety of entities. Some of those entities were sovereign wealth funds.30 “SWFs have much to offer. SWFs' recent injections of capital into several OECD financial institutions were stabilising because they came at a critical time when risk-taking capital was scarce and market sentiment was pessimistic.”31 Others were SOEs, which purchased some of the operating assets of ailing corporations in the United States and elsewhere.32 Moreover developing states moved quickly to convert failing businesses into SOEs on new models.33 Still, the fact that the owners of these vehicles are states now confounds the usual understanding inherent in the traditional system of separate legal spheres for public (regulatory) and private (participatory) activities. It was one thing when these funds were use by states as vehicles through which they held their reserves and protected their financial security.34 “But, as is often the case, when new actors emerge on the international financial scene, the players need to become better acquainted. The growing role of SWFs raises issues regarding the smooth functioning of financial markets and they raise investment policy questions, including legitimate concerns in recipient countries about protecting national security.”35

But with innovation comes challenges, especially from powerful host states. Thus, just as large aggregations of private wealth frightened public authorities in the 20th century, now large aggregations of public wealth seeking a home offshore produce a similar kind of fear in the same public actors.36 While governmental responses were at first wary—criticizing these funds as potentially dangerous to the sovereignty and independence of national markets,37 the increasing needs of national economic sectors quickly altered attitudes.38 But at the same time, international organizations have sought to impose some sort of regulatory framework on sovereign wealth funds, at least a framework that does not adversely affect capital markets and the needs of states for infusions of inbound investment, whatever its source. This has produced an approach that mimics that embraced for the regulation of multinational enterprises—guidelines and other soft law instruments grounded in transparency and benchmarking principles of good behaviors in efforts from that of the Organization for Economic Cooperation and Development (OECD),39 the European Union,40 and even various states.41 By the end of 2008, the group of leading sovereign owners of such funds had, with the participation of leading host states under the auspices of the International Monetary Fund, sought to develop a set of self governing mechanisms that would continue to make available to sovereign capital the same easy access to global markets that are enjoyed by non sovereign capital. The product of those efforts, the Santiago Principles,42 now serve as a benchmark of sorts for sovereign investment behavior, at least when undertaken through sovereign wealth funds—so denominated.

Several years earlier, other international actors, representing the bulk of SOE host state acquisition activity in the developed world, also sought to implement a set of framework guidelines for the activities of state owned enterprises that mimicked the standards developed under the Santiago Principles.43 The object was simple, to impose a minimum amount of transparency in SOE operations, but more importantly, to minimize the connection between sovereign owner and economic enterprise.44 By reducing the likelihood of the use of SOEs as instruments of sovereign policy, the hope was to forestall protectionist measures in host states in a way that paralleled the SWF regulatory framework.45

And so today, like their ancestors nearly a century ago, the guardians of public power articulate a growing fear of private aggregations of power, which threaten their power to control affairs within their national territory. Like their ancestors, they worry about large economic aggregations that threaten the viability of the traditional state system and the preservation of distinctions between public and private power. But unlike the perceived danger confronting their ancestors, the challenges today do not arise from the usurpation of public power by private enterprises. Instead it arises from the usurpation of private power by foreign public actors that reaches across borders.46 But this usurpation, in the form of sovereign investing through instruments of private commerce and in direct competition with private actors, inverts the logic of traditional confrontations between public and private power. So inverted, traditional analysis adds rather than reduces confusion and thus muddles policy approaches. If sovereign investing is understood as private actors participating in markets, then this might suggest the best case for similar treatment of states and private entities, because as far as any transaction is concerned, the state stands in the same shoes as a private investor. On the other hand, if sovereign investing is understood as the assertion of public sovereign authority through private markets, then these activities can be understood, in turn, as instruments that project sovereign power into the territory of other states.47 While the conceptual movement within the European Union had been toward a public law conception of all assertions of state power,48 whether within or outside the national territory, the view of other states and international regulators has taken a more ambiguous position.49

This essay considers sovereign investing in its dynamic character, as a catalyst for changes in policy and regulation. The focus of analysis is regulatory policy and its fundamentally dissonance producing character. This dissonance is grounded in the oppositional forces driving interaction with sovereign investment, at once suspicious of these investments as potentially dangerous to the sovereignty and independence of national markets, and solicitous of the investments themselves as a consequence of the needs of national economic sectors. These oppositional forces have only become more pronounced in the face of global financial crisis. Though responses have focused on law and policy to protect the integrity and workings of the markets themselves—both domestically and internationally—by decentering the sovereign element of sovereign investment, but without much of a plausible conceptual center, the effectiveness of this approach raises important questions about the relation between public an private law and the role of sovereigns pretending to be non sovereign in their in participatory activities in global private economic markets. More basic still, the discussion centers around the issue of the continued viability of the current distinction in the law grounded in mere status—between law frameworks applicable to public actors and that applicable to private actors, irrespective of the character of the acts subject to law. Still more dangerous, the current approaches to regulation insist in the system of hyper taxonomy that means to treat distinct aspects of sovereign investing separately. For every form of sovereign investing, there ought to be a separate regulatory system. This essay means to destabilize that conception of law and regulatory framework grounded on formalism and categorical segregation. It suggests that a governance system ought to be grounded in regulatory and participatory action irrespective of the status of the actor. As such, the current distinction between the public or private character of the actor will be subsumed to the question of the regulatory or participatory character of the action. It also suggests that the aggregation of sovereign investment suggests the need to abandon a piecemeal approach to regulation.

After an introduction contextualizing the problem as a function of the character and control of large aggregations of wealth, Section II focuses on sovereign wealth funds as projections of public economic power in private form. It focuses on issues of the conceptual dissonance issues in the definition and operation of sovereign wealth funds. The section ends by connecting those issues to policy debates about sovereign investing, especially in the form of sovereign wealth fund activity. Section III then considers state owned enterprises as another vehicle for sovereign investment abroad. It considers state owned enterprises as a fundamental component of innovative multi-vehicle deployments of sovereign wealth outside the national territory as part of the implementation of coordinated national development goals. Section IV then considers sovereign investing in its regulatory context. It considers the expression of the conceptual dissonance of sovereign investment regulation, examining national and supra national approaches to regulation and regulatory reform.

The conceptual context now framed, Section V turns to an examination of its sufficiency and relevance in the context of one of the great leading edge systems of sovereign investing now in development—the “Go Global” strategies of China in which important aspects of sovereign investing is coordinated to achieve both commercial and political aims that maximize the welfare of the Chinese state.50 “Beijing’s economic reforms (and broader foreign policy) reflect both a relatively coherent grand strategy for building China into a wealthy and powerful state and a domestic strategy for insuring the continued rule of the Chinese Communist Party.”51 Critically examined are these issues in that context. It considers the approach of China in the use of its state wealth through SWFs and SOEs. The focus will be on the construction of a unified outbound investment strategy by the Chinese state effected through complex arrangements between and within its sovereign wealth fund instrument, the China Investment Corporation (“CIC”), that is both sovereign wealth fund and state owned enterprise.52 “CIC was established on September 29th 2007 with the issuance of special bonds worth RMB 1.55 trillion by the Ministry of Finance. These were, in turn, used to acquire approximately USD 200 billion of China’s foreign exchange reserves and formed the foundation of its registered capital.”53 It invests directly in domestic and foreign assets, and through its subsidiaries, 54 invests in other Chinese SOEs, which in turn may also invest abroad.

In the course of the financial crisis, after 2008, while CIC’s investment strategy did not change, the portfolio (mix) of foreign and domestic has changed to favor domestic over foreign investments. As a result, the aggregate of CIC’s domestic investment appeared to strongly favor state-owned enterprises (SOEs). But the real consequence might have been a movement from direct financial investment to indirect investment through the activities of its subsidiaries and client SOEs, which in the course of CIC funding, increased their foreign acquisitions. A reason for these changes might have been to change the quality of the investment from small holdings in many foreign companies for a control of a few key foreign enterprises. But another reason might have been to avoid the limits and norms of Santiago Principles. From a host country perspective, such investment strategy may be aggressive for it suggests projection of foreign political power disguised as private investment; from an investing country perspective, such investment strategy may be defensive as the investing country is trying to minimize investment risk. This investment strategy suggests a number of consequences, which are explored in this section. They include the relationship between SOEs investment activities funded by SWFs and the application of the Santiago Principles, and the relationship between internal and external investment by governmental instrumentalities. CIC evidences a change in the traditional simple model of SWF to a multipurpose entity with blended public and private objectives. It serves as both sovereign investor in markets and domestic investor in SOEs which, in turn, invest in companies abroad. To the extent that CIC retains some oversight of SOE indirect activity, the sovereign can control the method of its projection of economic power in domestic and cross border markets.

The Chinese efforts to coordinate sovereign investing present a potentially substantial advance in the integration of programs of sovereign investing, public policy and private markets.55 It suggests that it may not make sense to segregate SWF regulation from other investment vehicles, and that it may be possible for a state to employ a policy of politically motivated interventions in foreign markets and markets for control that is, simultaneously, financially motivated. It follows that sovereign investing may not be adequately governed through frameworks that pretend that sovereigns can detach pieces of themselves and operate them as if they had no connection to them or interest in them. At the same time, it suggests that sovereign investing is to some extent a captive of the markets in which they operate—sovereign investment entities abroad will be subject to those host state national regulatory regimes that affect in equal measure all economic organs and the markets in which they operate. And in those markets, sovereign investment vehicles are likely to attempt to succeed, as success is conventionally measured among economic enterprises. The rise of sovereign market participatory entities, operating as both sovereign and private actors, will require a responsive regulatory framework substantially different from those currently in gestation.



Endnotes:

2 Gao Xiqing, interview with Alan Friedman, World Business, (Mr. Gao is the Vice Chairman, President and CIO of China Investment Corporation, the Chinese Sovereign Wealth Fund and was describing CIC’s investment strategy).

3 Louis K. Liggett Co. v. Comptroller of the State of Florida, 288 U.S. 517 (1933) (Brandeis, J. dissenting in part).

4 As one of its once discredited, and now increasingly popular critics, once noted:

[t]he images of legal science and legal practice were (and still certainly are) mastered by a series of simple equivalences. Law = statute; statute = the state regulation that comes about with the participation of the representative assembly. Practically speaking, that is what is meant by law when one demanded the “rule of law” and the “principle of the legality of all state action” as the defining characteristic of the Rechtsstaat.

CARL SCHMITT, LEGALITY AND LEGITIMACY 18 (Jeffrey Seitzer trans., Duke U. Press 2004) (1932).

5 See Dicey “The plain truth is that as a matter of law Parliament is the sovereign power in the state… As to the actual limitations on the sovereign power of Parliament.- The actual exercise of authority by any sovereign whatever, and notably by parliament, is bounded or controlled by two limitations. Of these the one is an external, the other is an internal limitation. The external limit to the real power of a sovereign consists in the possibility or certainty that his subjects, or a large number of them, will disobey or resist his laws.” ALBERT VENN DICEY. INTRODUCTION TO THE STUDY OF THE LAW OF THE CONSTITUTION, 73-74. MacMillan and Co., Limited 1915 8th ed. London; Also “Roughly speaking, Kelsen, for most of his professional life, conceived of the basic norm – that citizens ought to obey legal norms validly created in accordance with the historically first constitution – as a presupposition. That all the norms of a legal system derive ultimately from the basic norm has to be presupposed, he argued, because without this assumption that which we know to exist could not exist: positive law qua the object of cognitive legal science would not be possible.” Neil Dexbury, Kelsen’s Endgame, 67(1) Cambridge Law Journal, 51, 52 (2008).

6 See JOHN AUSTIN, THE PROVINCE OF JURISPRUDENCE DETERMINED, 118-119, (Oxford University Digitized 2006) (1861) (“Every positive law, or every law simply and strictly so called, is set by a sovereign person, or a sovereign body of persons, to a member or members of the independent political society wherein that person or body is sovereign or supreme. Or (changing the phrase) it is set by a monarch, or sovereign number, to a person or persons in a state of subjection to its author.”) Also, “…because Savigny sees the state as the organizing form of the people, consequently legislation emanates from, and therefore reflects, both customary and scientific law.” Ralf Michaels, Globalizing Savigny? The State in Savigny’s Private International Law and the Challenge of Europeanization and Globalization, DUKE LAW SCHOOL LEGAL STUDIES PAPER NO. 74, September 2005, at 11,
available

7 See, RUPERT EMERSON, STATE AND SOVEREIGNTY IN MODERN GERMANY 35-39, 60-77 (New Haven, CT: Yale University Press, 1928) (“While it is true that in the modern Rechtsstaat the sovereign cannot act otherwise than in compliance with law, it is equally true that he sets the law in accordance with which he is to act. The law lays down the formal procedure by means of which it can be changed, but the power which formulates and brings about the change is not the law itself.” Id., at 267). For a view of the notion from a historicist angle, see, e.g., Michel Rosenfeld, The Rule of Law and the Legitimacy of Constitutional Democracy, 74 Cal. L. Rev. 1307, 1318 (2001).

8 This move by the state to usurp the power of cataloguing reality is mocked in a wonderful passage in Gioacchino Rossini’s comic opera La Cenerentola in which the existence of and the death of a daughter was disputed solely on the basis of the appearance of her name in the registry of deaths and births. See, Jacopo Ferretti, La Cenerentola Act I, Scene VI (music by Gioacchino Rossini) (first presented Teatro Valle, Rome, Jan. 25, 1817) .

9 This was the age of the great German civil Code, the Bürgerlichen Gesetzbuche (1900), the current text of which, the Bürgerlichen Gesetzbuches, is available in English , and the rise of the great common law organizations, like the American Law Institute, devoted to the systematization of Anglo-American customary law on “sounder” principles. See, e.g., Larry Catá Backer, Symposium: Law and the State in the Transnational Legal Order: Reifying Law: Understanding Law Beyond the State, 26(3) PENN STATE INTERNATIONAL LAW REVIEW 521 (2008).

10 Larry Catá Backer, Economic Globalization Ascendant: Four Perspectives on the Emerging Ideology of the State in the New Global Order, 17(1) BERKELEY LA RAZA LAW JOURNAL 141 (2006).

11 See, e.g., the essays in NON-STATE ACTORS IN INTERNATIONAL RELATIONS (Bas Arts, Math Noortmann and Bob Reinalda, eds., Burlington, Vermont: Ashgate, 2001); and NON-STATE ACTORS IN WORLD POLITICS (Daphne Josselin and William Wallace, eds.,New York: Palgrave, 2001)

12 For primary sources on this project, see, United Nations, Global Compact. For a discussion, see, e.g., Jean-Philippe Therien and Vincent Pouliot, The Global Compact: Shifting the Politics of International Development?, 12(1) GLOBAL GOVERNANCE 55 (2006).

13 See, REPORT OF THE SPECIAL REPRESENTATIVE OF THE SECRETARY-GENERAL ON THE ISSUE OF HUMAN RIGHTS AND TRANSNATIONAL CORPORATIONS AND OTHER BUSINESS ENTERPRISES, PROFESSOR JOHN RUGGIE TO THE UNITED NATIONS HUMAN RIGHTS COUNCIL, PROTECT, RESPECT AND REMEDY: A FRAMEWORK FOR BUSINESS AND HUMAN RIGHTS A/HRC/8/5, 7 April 20, 2009.

14 The OECD Guidelines for Multinational Enterprises and related documents are available online.

15 Larry Catá Backer, Multinational Corporations, Transnational Law: The United Nation's Norms on the Responsibilities of Transnational Corporations as Harbinger of Corporate Responsibility in International Law, 37(3) COLUMBIA HUMAN RIGHTS LAW REVIEW 287-389 (2006).

16 “First among equals,” a not so veiled reference to both the idea of vertical relationships within formally horizontal systems of power sharing, and a reminder that such systems mask rather than reveal real shifts in governance hierarchies. That was certainly the case within the late Republic and Early Empire when the term was meant to anchor government within Republican forms even as it strongly shifted the reality of the state apparatus toward monarchy. Thomas O. Hueglin, Johannes Althusius: Medieval Constitutionalist or Modern Fderalist?, 9 (4), PUBLIUS THE JOURNAL OF FEDERALISM, 9, 12 (Autum 1979).

17 Larry Catá Backer, The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares, Sovereign Wealth Funds, and the Public Law Element in Private Choice of Law, 82(1) Tulane Law Review 1801 (2008).

18 For an exposition of the cheery picture reflecting elite consensus views, see, e.g., Paul Rose, Sovereigns as Shareholders, 87 NORTH CAROLINA LAW REVIEW 83-149 (2008); Robert M. Kimmett, Public Footprints in Private Markets: Sovereign Wealth Funds and the World Economy, 87(1) FOREIGN AFFAIRS 119, 126-128 (2008).

19 The term refers to official sector assets that began to be regarded as something different from traditional central bank reserves. It appears to have been popularized in 2005. “However, increasingly, a different type of public-sector player has started to register on the radar screen - we shall refer to them as sovereign wealth managers. These are neither traditional public-pension funds nor reserve assets supporting national currencies, but a different type of entity altogether.” Andrew Rosenov, Who Holds the Wealth of Nations, 15(4) CENTRAL BANKING 52-57 (2005), .

20 On the resurgence of state owned enterprises as a vehicle of economic activity, see, e.g., see H. Stephen Harris, Jr., Legal Implications of a Rising China: The Making of an Antitrust Law: The Pending Anti-Monopoly Law of the People's Republic of China, 7 CHI. J. INT'L L. 169, 173 (2006); CITE. For discussion in the popular press, and the making of opinion among the electorate, see, e.g., Austin Ramzy, Why China's State-owned Companies Are Making a Comeback, TIME MAGAZINE, April 29, 2009.

21 Global Investment Watch, Rob Kellog: The Rise of Sovereign Wealth Funds- Part I (October 17, 2008). “Because Sovereign Wealth Funds have long term investment horizons and generally have no commercial liabilities, they are better placed than most private investors to withstand market pressures in times of crisis. For this reason, Sovereign Wealth Funds have been a stabilising force during the current financial turmoil.” Speech by Joaquin Almunia, European Commissioner for Economic and Monetary Policy, The EU response to the rise of Sovereign Wealth Funds, Brussels, at Crans Montana forum, April 2, 2008.

22 Global Investment Watch, Rob Kellog: The Rise of Sovereign Wealth Funds- Part III (October 31, 2008). “Of course, the formation of SWFs is not a new phenomenon. However, almost two thirds of the existing Funds were established in the past decade. As a result, the importance of Sovereign Wealth Funds has grown not only within their own countries, but their relevance also has increased for the international financial system” John Lipsky, First Deputy Managing Director of the International Monetary Fund, Sovereign Funds: Responsibility with Our Future, Speech Before seminar organized by the Ministry of Finance of Chile (September 3, 2008) .

23 Simon Johnson, The Rise of Sovereign Wealth Funds.

“Though oil-producing countries have been looking at investments in the West since the 1970s, their strategies back then were largely confined to safe assets with a low return, like United States Treasury debt. By 2001, with the collapse in oil prices, many of the oil exporters had depleted their dollar reserves, economists say. But the boom in oil prices in the last five years has changed all that. It has persuaded oil producers to set up or expand “sovereign wealth funds” as vehicles to invest far more aggressively in the West, in their own economies and in emerging markets.”

Steven R. Weisman, Oil Producers See the World and Buy It, N.Y. TIMES, November 28, 2007.

24 Though, of course, sovereign immunity, and the exceptions thereto written into the domestic law of the relevant state, would still apply to the sovereign owner—though not to the non-sovereign fund. See, e.g., U.S: Foreign Sovereign Immunity Act, Pub. L. No. 94-583, 90 Stat. 2892 (1976), 28 U.S.C. Secc. 1604. The difference is conceptually important. The traditional conflation implies that such funds are instrumentalities of the state and irrevocably so.

25 The classic recent case was the controversy in the United States in 2006 when a multinational enterprise controlled by a Persian Gulf state sought to acquire right to administer ports in the United States. See David E. Sanger, Under Pressure, Dubai Company Drops Port Deal, NEW YORK TIMES, March 10, 2006.

26 For a discussion of aspects of this innovation, see, e.g., Rachel Ziemba, Sovereign Wealth Funds as Development Funders, RGE MONITOR, February 25, 2008.

27 This has affected not only traditional operators of SWFs and SOEs but developed countries like the United States. For a discussion, see Benjamin A. Templin, State Entrepreneurism, SSRN Paper July 2, 2009,.

28 Currently, public expert bodies place the start of the current economic turmoil sometime in 2007. See International Monetary Fund, IMF Urges G-20 States To Take More Decisive Action to Combat Crisis, IMF Survey Online, February 5, 2009. But that determination was put off until the time of the 2008 American Presidential election. . See U.S. Department of the Treasury, Remarks by Secretary Henry M. Paulson, Jr. on Financial Rescue Package and Economic Update, Press Room, November 12, 2008.

29 Yale Global Online, World Rides to Wall Street’s Rescue, January 17, 2008, can be found. Foreign governments rescued troubled American financial institutions facing near collapse due to the acute subprime crisis during the second part of 2007 and early 2008 as noted by David Cho:

The nation's biggest financial firms, battered by huge losses in their mortgage businesses, are relying on an enigmatic source for cash: foreign governments in the Middle East and Asia. Citigroup announced yesterday that it had sold a 7.8 percent stake in the company worth $14.5 billion to a group of investors, including the government of Singapore and Saudi Prince Alwaleed bin Talal, as it revealed a colossal $10 billion loss for the fourth quarter. Merrill Lynch, which is expected to report a massive loss tomorrow, said that it sold a special class of stock worth $6.6 billion to funds managed by South Korea and Kuwait. This is the second time in recent months that the two banks have sought help from foreign government investment pools, known as sovereign wealth funds.

David Cho, A Growing Foreign Stake in U.S. Banks, THE WASHINGTON POST, January 16, 2008.

30 Economist.com, America’s Bailout Plan: The Doctor’s Bill. “In fact, troubled U.S. institutions were able to raise significant amounts of new capital. Much of this money — over $30 billion by one estimate — has come from government sources, but not the American government. Instead, sovereign wealth funds operated by China, Singapore, Abu Dhabi, and other countries have taken large equity stakes in Citigroup, Merrill Lynch, Morgan Stanley, and other firms, including leading European financial institutions.” See Mark Jickling, Averting Financial Crisis, by CRS Report RL34412 March 21, 2008.

31 Organization for Economic Cooperation and Development, Investment Committee, Report on Sovereign Wealth Funds (SWFs) and Recipient Country Policies, April 4, 2008, at 2-3.

32 See, Rachel Ziemba, Sovereign Wealth Funds as Development Funders, RGE MONITOR, February 25, 2008.

33 In the United States, the economic and financial crisis has produced new forms of state owned enterprises in AIG and General Motors. With respect to AIG see , U.S. TREASURY PRESS RELEASE U.S. Treasury and Federal Reserve Board Announce Participation in AIG Restructuring Plan, March 2, 2009. For General Motors see, The New General Motors Company Launches Today , News Release, July 10, 2009.

34 As Andrew Rozenov note:

These days one often hears a question posed with regard to huge foreign exchange reserves accumulated by these countries along the lines of: “Do they really need so much?" In terms of intervening to support their currencies, the answer is a resounding no. But frame the question differently: “How much sovereign wealth do these countries need to provide economic, political and social security - be it through faster development or dependable insurance against the huge risks they run?" and the answer may well be different. One example may best illustrate the point: Kuwait managed to regain its independence and rebuild the country after the Iraqi invasion in large part thanks to the large pool of assets accumulated and managed by KIA [Kuwait Investment Authority].

Andrew Rozenov, Who Holds the Wealth of Nations, Central Banking, 2005, 15(4), 52-57,

35 Id.

36 See discussion on concerns about SWFs in Lee Hudson Teslik’s article, Sovereign Wealth Funds, COUNCIL ON FOREIGN RELATIONS, January 28, 2009 ( “The major looming factor is how SWFs will be used in practice. Will governments use them simply as financial tools and eye investments from a purely financial standpoint, or will SWFs emerge as an implement of political muscle?”). “The longer the United States relies on central banks and sovereign funds to support large external deficits, the greater the risk that the United States’ need for external credit will constrain its policy options.” Brad W. Setser, Sovereign Wealth and Sovereign Power, Council on Foreign Relations, Center for Geoeconomic Studies, Council Special Report No. 37 (Sewpt. 2008), at 5.

37 Edwin M. Truman, The Rise of Sovereign Wealth Funds: Impacts on US Foreign Policy and Economic Interests, Testimony before the Committee on Foreign Affairs, US House of Representatives, Washington, (May 21, 2008). “During the second half of 2007 and early 2008, some SWFs made high-profile investments in major U.S. and European companies. Amid growing unease about some SWFs' governance structures and investment objectives, U.S. and European policymakers aired a mix of divergent points of view. French President Nicolas Sarkozy made hawkish statements, as did many politicians in Germany. The U.K. government took a more welcoming stance toward SWFs. The U.S. Treasury was the most proactive, agreeing to a set of investment principles with two of the largest SWFs.” Oxford Analytica, West Approaches Opaque SWFs with Caution”, FORBES.COM, September 30, 2008.

38 “OECD member countries have come out strongly in this debate in welcoming Sovereign Wealth Funds and have given us a mandate to develop guidance for recipient countries. And we came out first. . . . We can congratulate ourselves on an outcome where SWFs, working with the support of the IMF, and the OECD were able to create a positive interaction – a real synergy – that has delivered something important to the global economy.” Remarks by Angel Gurría, OECD Secretary-General, during a briefing with the United States Council for International Business, Washington, D.C. Oct. 13, 2008.

39 The OECD has also developed a set of principles. See Organization for Economic Cooperation and Development, Investment Committee, Report on Sovereign Wealth Funds (SWFs) and Recipient Country Policies, April 4, 2008, at 5, available (Investment çpolicy guidance from the freedom of investment project).

40 For a discussion of the European Union engagement with this project, see discussion infra at text and notes ---.

41 Prominent among these has been the United States. See, Treasury Reaches Agreement on Principles for Sovereign Wealth Fund Investment with Singapore and Abu Dhabi (March 20, 2008) and discussion at text and notes --, infra.

42 See, International Working Group of Sovereign Wealth Funds, Sovereign Wealth Funds: Generally Accepted Principles and Practices; “Santiago Principles, (October 2008) (hereafter the “Santiago Principles”).

The IWGSWF explained The International Working Group of Sovereign Wealth Funds (IWG) presented the Santiago Principles to the International Monetary Fund's policy-guiding International Monetary and Financial Committee on October 11, 2008. The IWG made public the set of 24 voluntary Principles and related explanatory material and announced it has established a Formation Committee to explore the creation of a Standing Group of Sovereign Wealth Funds.

International Working Group of Sovereign Wealth Funds, Home. The principles are meant to be transposed into the municipal law of the adherents thereto. “In furtherance of the "Objective and Purpose", the IWG members either have implemented or intend to implement the following principles and practices, on a voluntary basis, each of which is subject to home country laws, regulations, requirements and obligations. This paragraph is an integral part of the GAPP.” International Working Group of Sovereign Wealth Funds, Generally Accepted Principles and Practices (GAPP)—Santiago Principles.

43 The OECD Guidelines on Corporate Governance of State Owned Enterprises were adopted by the OECD Council in April 2005. See OECD Guidelines on Corporate Governance for State-owned Enterprises. According to the OECD website, “The OECD Guidelines on Corporate Governance of State-Owned Enterprises aim to give concrete advice to countries on how to manage more effectively their responsibilities as company owners, thus helping to make state-owned enterprises more competitive, efficient and transparent.”

44 Id “The government should not be involved in the day-to-day management of SOEs and allow them full operational autonomy to achieve their defined objectives”, at Section II “The State Acting as Owner” pp. 13.

45 See OECD Guidelines on Corporate Governance for State-owned Enterprises, Foreword, “Building on practical experience, these Guidelines provide concrete suggestions on how such dilemmas can be solved. For example, they suggest that the state should exercise its ownership functions through a centralised ownership entity, or effectively coordinated entities, which should act independently and in accordance with a publicly disclosed ownership policy. The Guidelines also suggest the strict separation of the state's ownership and regulatory functions. If properly implemented, these and the other recommended reforms would go a long way to ensure that state ownership is exercised in a professional and accountable manner, and that the state plays a positive role in improving corporate governance across all sectors of our economies. The result would be healthier, more competitive and more transparent enterprises.” OECD Guidelines. For the SWF approach, see, International Working Group of Sovereign Wealth Funds, Generally Accepted Principles and Practices (GAPP)—Santiago Principles (“This understanding aims to contribute to the stability of the global financial system, reduce protectionist pressures, and help maintain an open and stable investment climate.”).

46 “The most obvious consideration is national security. As with any form of foreign investment, countries on the receiving end of SWF investment need to ensure that national security concerns are addressed, without unnecessarily limiting the benefits of an open economy.” Robert M. Kimmitt, Public Footprints in Private Markets: Sovereign Wealth Funds and the World Economy, 87(1) FOREIGN AFFAIRS 119, 123 (2008) (Mr. Kimmitt was a Deputy Treasury Secretary in the administration of George W. Bush).47 See Javier Santiso, Sovereign Development Funds, OECD Policy Insights, No. 58 (April 2008) (“financial actors from developing countries are playing with other OECD financial giants as equals” through their sovereign wealth funds.” Id., at 1).

48 Larry Catá Backer, The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares, Sovereign Wealth Funds, and the Public Law Element in Private Choice of Law, 82(1) Tulane Law Review 1801, 1845-1863 (2008).

49 See, e.g., See International Working Group of Sovereign Wealth Funds, Sovereign Wealth Funds: Generally Accepted Principles and Practices; “Santiago Principles, (October 2008). For a discussion, see, e.g., Paul Rose, Sovereigns as Shareholders, 87 N.C. L. REV. 83, 127-141 (2008). For a discussion in the context of Chinese sovereign investing, see Jason Buhi, Negocio de China: Building upon the Santiago Principles to Form an Effective International Approach to Sovereign Wealth Fund Regulation, 39 Hong Kong L.J. 197 (2009).

50 走出去 zǒuchūqū and its connection to Chinese SWF and SOE investment strategies is discussed infra at text and notes, --.

51 Philip C. Saunders, China’s Global Activism: Strategy, Drivers, and Tools, Institute for National Strategic Studies Occasional Paper No. 4 (Washington, D.C.: National Defense University Press, 2006) at 3.

52 “China Investment Corporation (CIC) is an investment institution established as a wholly state-owned company under the Company Law of the People’s Republic of China and headquartered in Beijing.” China Investment Corporation, About Us, Overview, available (accessed July 12, 1009). CIC’s mission “is to make longterm investments that maximize risk adjusted financial returns for the benefit of its shareholder.” Id.

53 Id. In addition, “Because its financing is grounded in financial instruments and subject to commercial obligations, CIC maintains a strict commercial orientation and is driven by purely economic and financial interests.” Id.

54 Central Huijin Investment Ltd. (Central Huijin) is a wholly-owned subsidiary of CIC with its own Board of Directors and Board of Supervisors. It was established to invest in key state-owned financial institutions in China; it does not conduct any other commercial activities and is not involved in day-to-day issues within the institutions in which it invests.” Id. According to the abstract of its articles of association, “To the extent of its capital contribution, Huijin shall, on behalf of the State and in accordance with applicable laws, exercise the rights and perform the obligations as an investor in state-owned major financial enterprises, such as the Industrial and Commercial Bank of China, Bank of China and China Construction Bank, represent the State's controlling position in large-scale financial institutions and achieve value preservation and enhancement of state-owned financial assets.” China Investment Corporation, Governance, Articles of Association (Abstract). Jianyin Investment, Ltd., a wholly owned subsidiary of Huijin Investment, was acquired in 2004, and is in the busines sof subsidizing Chinese brokerage firms, or taking them over. China’s CIC Unit Jianyin Investment 2007 opg Profit Over 10 bln Yuan—Xinhua, Forbes, Feb. 26, 2008.

55 It thus suggests a sovereign investment strategy that coordinates all elements of public and private power, and, to some extent, private actors as well, to project state power abroad in a coordinated and directed way. Xie Ping, Chen Chao, Sovereign Wealth Funds, Macroeconomic Policy Alignment and Financial Stability, SSRN Paper available (accessed July 10, 2009) at 3 (“It is possible for size and behavior of investments by SWFs to affect a country’s financial market, monetary policy, balance of international payments, and fiscal policy, even wealth allocation in public sector and investment behaviors in private sector.” Id.).