The market accountability model suggests that market competition provides rewards and sanctions through the aggregation of individual investor or consumer choices. . . . The legal accountability mechanism emphasizes the role of enforceable and explicit rules, which are preset and rule-based, rather than discretionary and sometimes unpredictable rules which can be subject to arbitrary power held by political elites. (Id., at 4).
First, the registered capital of CIC comes from fiscal revenue rather than foreign exchange reserves. . . . Second, there is no dynamic linkage, either institutional or practical, between the PBOC and CIC, suggesting that CIC will operate on the basis of the US$200 billion registered capital separately and independently of forex reserve administration. . . . Third, CIC is viewed as a full ministerial enterprise. . . . They have been periodically scaled and estimated by the State Assets Supervision and Administration Commission (SASAC), and the Organization Department of the Communist Party of China (CPC), in terms of administrative ranking, such as full-ministerial, deputy-ministerial, and so on, according to the strategic importance and performance of the enterprises in their charge. (Id., 8).
On the one hand, while still under the control of the State Council, CIC has been placed in the current legal framework and even pushed into international markets without most, if not all, of the privileges enjoyed at home. This legitimization is indeed a kind of progress. In the context of CIC’s formation, the State Council does not (at least not so arbitrarily or publicly), play its old roles as a money- maker with a soft budget or as a de facto self-disciplined market regulator. Instead, it is an indirect and implied controller behind the scenes and a tax collector. On the other hand, this progress is not as apparent, especially in Westerners’ minds—most of whose states have achieved the fiscal as well as governance transformations of modern states even before the last century. (Id., 13)
If the lack of legal accountability could be corrected in some proper way, CIC and other SWFs could be equated with other institutional investors in the global financial market, such as hedge funds, private equities, or pension funds. In other words, on the condition that non-commercial motivations can be separated from the operation of SWFs by an effective legal accountability mechanism, SWFs share plenty of similarities with other institutional investors, especially in decision-making and risk management. (Id., 14).
Therefore, it is imperative for China and other governments to substitute political mechanisms with legal and market mechanisms. This means that home countries should move first to mitigate the concerns. As for China, the State Council or NPC should clarify the legal status of CIC in special legislation and ensure ‘‘arm’s-length’’ relationships between the professional investment institutions and administrative agencies. . . . As for market accountability, special efforts should be made to create an incentive-compatible remuneration scheme. This should also be different from a valuation system for either civil servants or CPC cadres, in order to attract experts and skilled staff. . . . The second step is to eschew laws and regulations that target SWFs specifically, and by definition treat them differently from other large institutional investors." (Id., 19-20).
The effort is laudable--the deepening of global investment markets more detached from the control of states serves as a great counterweight to the parochial interests of states. It also serves a s a mechanism through which private power can be deployed to soften the rougher edges of state policy, especially when it seeks to assert influence beyond its borders. But the fundamental character of states is difficult to overcome, and it is unclear that states can shed their fundamental nature merely because they assume a form available to non-state actors. As a consequence, the insight that leads LI toward the necessity of legal and market accountability frameworks is powerful--especially when that sort of accountability is detached from any state (and perhaps is invested in the community of states producing consensus through a blending of their adversarial interests). But LI also demonstrates the difficulties of SWF entities overcoming their own natures.
In a sense the problem of SWFs, like that of SOEs engaging in investment activities abroad, can be reduced to issues of abuse. These include the abuse of power, abuse of corporate form, abuse of the corporate franchise, and abuse of the market. Much of what is required, then, are rules that ensure that, like their private or individual counterparts, abuse is controlled and the integrity of markets is preserved. This is both a tall order and a manageable task. But to that end, a solution requires a reconception of states when they engage in market-participatory activities. (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, 19(1):3-144 (2009), at pp. 144).