Sunday, September 20, 2009

On SWF Autonomy: Restructuring the China Investment Corporation

The China Investment Corporation, the Chinese sovereign Wealth Fund, is the principle organ of Chinese sovereign investing. I have suggested the nature of that investing in recent work. See, Larry Catá Backer, Sovereign Investing in Times of Crisis: Global Regulation of Sovereign Wealth Funds, State Owned Enterprises and the Chinese Experience, Transnational Law & Contemporary Problems, Vol. 19, No. 1, 2009. It describes itself as
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. The mission of CIC is to make long-term investments that maximize risk adjusted financial returns for the benefit of its shareholder. 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. 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.
China Investment Corporation, About Us.

Recent reports suggest the nature of CIC's notion of the nature of its fiduciary obligation and its commercial orientation. It was reported that, to accomplish its national development goal and to actively manage its sovereign wealth fund and state-owned enterprises, China’s Ministry of Finance recently reached an agreement with CIC to treat the $200 billion US Dollars that was originally used to finance CIC as CIC’s assets rather than a debt. Ouyang Xiaohong, Liu Peng, CIC No Longer to Pay Interest to the State, Economic Observer, Aug. 26 2009, CIC used to pay about 66.65 billion Yuan ($9.76 billion US Dollars) in interest to the state each year, while this agreement relieved CIC from the obligation to make regular interest payments to the state. (Id.). CIC may, like other central state-owned enterprises, begin to pay dividends at regular intervals to the state. (Id.). " “SOEs involved in the tobacco, oil, chemical and power industries should pay 10 percent of their capital returns to the state while those in steel, transportation and electronics businesses pay five percent. … According to its first annual financial report, the CIC registered a 6.8 percent return on its capital and its net profits reached 23.13 billion US dollar in 2008. Based on calculations, CIC may pay dividends worth 68.3 billion yuan ($10 billion) to the state.” Id."

Yet, an official from the Ministry of Finance revealed that it was still not settled as to whether to let a state owned financial enterprise pay dividends. The official described CIC as “a semi-government body” and stated that “CIC's board of directors should decide how to pay dividends to the state and then submit its decision to the State Council.” By signing this agreement, the Chinese government presumably took another step in accelerating implementation of its “Go Global” Strategy. This step also reflects China’s endeavor in building a sophisticated state investment network by combining the SWF and SOEs, because, now, the state acts as a real shareholder of its SWF, which is not different from its role in the operation of other SOEs.

Restructuring capital, of course, is a constant among businesses. And, indeed, the conversion of its debt provides CIC with a necessary flexibility in its formal obligations to service its debts. That was clearly a motive in this case, as "Wen Zongyu, a researcher in Research Institute for Fiscal Science under the MOF, estimated that due to negative affect of natural disaster and the global financial crisis, the total dividends paid by central SOEs, (excluding CIC) to the state, wouldn't exceed 40 billion yuan ($5.86 billion). " CIC No Longer to Pay Interest to the State, supra. CIC is likely to prefer the flexibility, especially since the state retained its role. In effect, the state now has shifted a debt to an equity interest. Yet because the state retains its control, it is not clear that the change affects the overall control structure of the enterprise.

What makes the recent restructuring more interesting is its importance for revealing something of official thinking about the sovereign nature of the SWF enterprise in China. It also suggests the way in which such officials conflate the interests of the state owner and the enterprise itself. CIC is not meant to maximize its autonomous long term interests, but rather those of its state owner. This, in itself, might not be substantially different from conceptions sometimes advanced in the West. When combined with the suggestion that the board of directors have a somewhat limited autonomy in the direction of the enterprise, however, the structure of CIC as an autonomous corporation becomes harder to maintain on conventional grounds. The intimation that the State Council, rather than the board of directors, has ultimate authority for the declaration of dividends, suggests that it is the State Council, rather than the Board of directors, that has ultimate management authority for CIC. And that suggests a weakness in efforts to depict CIC, and Chinese sovereign investing, as driven strictly by commercial, rather than state interests. This does not suggest, in turn, a criticism of CIC and its management structure. Rather, it suggests the difficulty of squaring that approach to the assumptions inherent in emerging global soft governance approaches to sovereign wealth funds. See, Larry Catá Backer, Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment, Georgetown Journal of International Law, Vol. 40, No. 4, 2009.

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