On Autonomy and Complexity in the Chinese Sovereign Wealth Fund

A few weeks ago I noted the announcement of a restructuring of the capital of the Chinese sovereign investment vehicle, the China Investment Corporation, and changes to dividend policies of potential effect to its operation. See Larry Catá Backer, On SWF Autonomy: Restructuring the China Investment Corporation, Law at the End of the Day, September 20, 2009. I 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.)."

I was especially interested in what the restructuring suggested about the semi governmental status of the China Investment Corporation, and the ramifications of that characterization fopr emerging global regulatory systems that are based on the core assumption that entities like the CIC would be considered as autonomous of the government organs that owned their shares and whose objectives would be economic rather than political. See, Larry Catá Backer, On SWF Autonomy: Restructuring the China Investment Corporation, supra.

But reality is always more complicated than any linear analysis is capable of describing.

CIC, as positioned at the premium cabinet-level within the Chinese government, is responsible directly to the State Council through the State Owned Assets Supervision and Administration Commission of the State Council (SASAC). This is meant to effect the policy of separation of economic and political functions within the state apparatus. ( Keith B. Griffin, Institutional reform and economic development in the Chinese countryside, 99 (1984). But that separation is effected only functionally. . . . The State Council through SASAC exercises the authority of appointment and dismissal of the governing board members of the CIC. But the organization of CIC produces a formal separation between state and fund operator. 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.

“On the principle of separating government administration from enterprise management and separating ownership from management power, SASAC performs the responsibility as the investor on behalf of the state; supervises and manages the state-owned assets of enterprises according to law; guides and pushes forward the reform and restructuring of SOEs. SASAC appoints and removes top executives of the enterprises under the supervision of the Central Government, evaluates their performances, and grants them rewards or inflicts punishments. SASAC also directs and supervises the management work of local state-owned assets.” State Owned Assets Supervision and Administration Commission of the State Council (SASAC), The People’s Republic of China, Welcome to the Website of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC).

Recent reports add another layer of meaning, and implications, to the restructuring. SASAC (国资委) appears to be involved in a contest for control of SOEs, including the CIC, with the Ministry of Finance. ChinaBizGov recently reported that

Currently, only the Finance Ministry (财政部)has the authority to compile public budgets in China. SASAC's only role when it comes to money is to collect dividends from the SOEs that it controls and hand them off to the Finance Ministry.

A few years ago, when SASAC's role of "dividend hand off" was established, it followed a bitter battle between SASAC and the Finance Ministry for control of these monies. SASAC's reasoning was that, as controlling shareholder of these SOEs, it should naturally control the dispensation of dividends to which it is entitled. In the end, the Finance Ministry was simply too powerful, and managed to relegate SASAC to its hand off role. Though it controls the shares of China's largest and most important SOEs, SASAC has no source of revenue and must depend on the Finance Ministry for its own budget.

Now SASAC is at it again. They have apparently been circulating a draft resolution among local government SASACs that would give SASAC the authority to independently draw up the budget for central state-owned enterprises (独立编制央企预算). This is not an inconsequential sum. In 2008, central SOEs submitted over 500 billion yuan ($73.5 billion) in dividends to the central government. SASAC's Budget End-Run, ChinaBizGov, Sept. 26, 2009.

That article, 国资委打算独立编制央企预算, (Dazhong Xiao, SASAC intends to prepare an independent central enterprise budget) Economic Observer Online, Sept. 26, 2009, is worth reading in full. It reminds us of the difficulties of maintaining a separation of public and private functions of state owned enterprises. It appears that this separation, was to be achieved by separating the budgeting function between the Ministry of Finance and SASAC. As owner of state owned enterprises, SASAC was originally intended to also be responsible for SOE budgeting. The Ministry of Finance, as the political organ, was responsible for public sector budgeting. But this division, reflecting a separation of public and participatory finance was eliminated by the middle of this decade.

早在2003年国资委成立之初，国有资本经营预算编制，由谁来主导的话题就开始被频繁提及。

中国政法大学教授刘纪鹏回忆说，“在最初的设计中，国有资本经营预算由国资委独立制作，和财政部制作的公共预算一样，每年由国务院审批，并向全国人大汇报表决通过。”

而在国资系统人士看来，有没有这个“财权”，决定了国资委在多大程度上履行了出资人的职责，也决定了国资委能有多大的作为。

但最终，2007年9月8日发布的《国务院关于试行国有资本经营预算的意见》明确，财政部成为国有资本经营预算的主管部门。在上收的央企红利由谁来主导支出这个敏感问题上，国务院确定，企业提出需要资金的申请，由财政部门审核后，才能拨付给使用单位。

由此，国资委成为了财政部和企业之间的一个“漏斗”，每年的央企红利由国资委收取然后转交给财政部，而在这数百亿资金的支出上，国资委基本丧失了话语权。国资委打算独立编制央企预算,supra.

("Upon the establishment of the SASAC in 2003, it has been frequently mentioned as to who should be in charge of the budget planning of state owned capitals. Professor Liu Jipeng at China University of Political Science and Law recalled that, “according to the initial plan, the SASAC would be solely responsible for the budget planning of state owned capitals, just like the public budge conducted by the Ministry of Finance. The budge would be reviewed by the State Council and passed by the National People’s Congress.” From the perspectives of people in the SASAC, whether to have control over these capitals determines how and to what level the SASAC can act as a shareholder. Eventually, State Council on Trial State-Owned Capital Management Budget (Sept. 8, 2007) provided that the Ministry of Finance became the department in charge of the state owned capitals. In regard to a sensitive issue of who shall manage the expense of dividends paid by central state owned enterprises, the State Council provided that enterprises need to submit application for approval by the Ministry of Finance. Therefore, the SASAC became a funnel between the Ministry of Finance and those enterprises. The SASAC passed the dividends gathered from central state owned enterprises to the Ministry of Finance, while the SASAC lost the right of speech on how to expend the hundreds of millions of capitals.

As a result, SASAC became the owner, but the power over SOE finances devolved to the overtly political organ of state. And thus it becomes clearer why, within the state apparatus in China, it is sometimes difficult to conceive of SOEs as independent, and not merely another organ of state policy, one that advances state policy within markets, rather than through regulation. Indeed, that appears to be the position of officials in the Ministry of Finance. "财政部中国国有资产管理学会秘书长王宝库也提醒说，目前我国的复式预算制度还没有建立，《预算法》中规定政府预算的唯一编制主体仍然是公共预算" 国资委打算独立编制央企预算, supra. ("The Secretary General at the State Owned Asset Management Institute of the Ministry of Finance, Wang Baoku, also warned that China has not yet established it double-entry budget system, and that, under the Budge Law, the public budget is still the only subject of governmental budget planning. " Id.). As a consequence, the budgets of SOEs, like the China Investment Corporation, are characterized as part of the public budget.

China does not recognize a division between the budgeting of SOEs and public budgets as functionally distinct and separable. That division is apparently what SASAC is advancing in experiments in Shenzhen province. "“也就是说，财政部门只负责公共预算管理。国资监管部门负责国有资本的收益预算管理。每年市财政部门和市国有资产监管部门分别向市人大来报告各自的预算。”贾和亭回忆说。" 国资委打算独立编制央企预算, supra. (""In other words, the financial sector is only responsible for the public budget management. Owned Assets Supervision department is responsible for state-owned capital gains budget management. Each of the municipal finance department and the municipal state-owned assets supervision and administration departments are to report to the municipal people's congresses and their respective budgets." Jia and pavilion recalls."). This effort is derided by the Ministry of Finance an official of which suggested that "'the current document reflected a lot of ideas are the SASAC wishful thinking, a lot of aspects involved and the delicate relationship between the Ministry of Finance, the future of the road is still hard to say.'" 国资委打算独立编制央企预算, supra. ("'目前文件上体现出来的很多想法都是国资委的一厢情愿，很多方面都牵涉到和财政部的微妙关系，未来的路还很难说。'" Id.).

The amalgamation of budgeting, and the dividend policy within the Ministry of Finance suggests a closer relationship between state its state owned enterprises, including its sovereign wealth fund. That relationship is complex--involving networks of interlocking control involving assignment of share ownership, the power to determine SOE budgets, the autonomy of the budgeting and operational processes, and the role of the Chinese Communist Party.

This story illustrates a couple of interesting aspects about governance in China. One is the constant battle over resources that takes place at the ministerial level. Money is power, and China is no different from any other country whose various departments fight over resources. The other is the variety of policies being implemented by local governments. Foreign observers so often talk of China as if it is a monolith, but this story illustrates that, when you open the box, there are a lot of moving parts, some of which don't rub each other very well. SASAC's Budget End-Run, ChinaBizGov, Sept. 26, 2009.

But it evidences something else as well, something substantially more revealing. When it comes to an understanding of the organization, control and ownership structure of the China Investment Corporation, complexity tends to make simple analysis difficult. It appears, though, that while the China Investment Corporation does operate independently and principally for economic objectives within the ambit of its autonomy, that autonomy is both circumscribed by SASAC in terms of policy, and the Ministry of Finance in terms of its operational budget. As a consequence, it is easier to understand at least two fo the strands of control by state organs that can affect the ways in which CIC might choose to effect its economic objectives in light of the needs of overarching state policy and goals.