Saturday, January 25, 2014

Sovereign Investing Evolves in in China--Gao to pass on the reins at CIC

I have written about the spectacular growth of the Chinese Sovereign Wealth Fund--that is that cluster of funds that, together, now have become an immensely influential force in global markets, which is centered on the China Investment Corporation (CIC).  (Backer, Larry Catá, 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). 

 (Gao Xiqing, Vice Chairman & President)

I have suggested that as it has developed, it is providing one of three principle models of sovereign investing in this century. (Backer, Larry Catá. "Sovereign Investing and Markets-Based Transnational Rule of Law Building: The Norwegian Sovereign Wealth Fund in Global Markets." American University International Law Review 29 no. 1 (2013): 1-122)). All three contribute in significant ways to the merger of public and private governance systems touching on social, cultural and economic rights (e.g., Backer, Larry Catá, 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. Tulane Law Review, Vol. 82, No. 1, 2008). Even the United States may be toying with the idea of a national fund (we have state funds) ostensibly as an economic stabilization mechanism (John Aziz, Does the United States need a sovereign wealth fund? The Week, Jan. 2014). The notion of regulation through markets intervention as a private player pursuing public interest appears to be strengthening. 

Now comes the news that one of the principal forces behind the construction of the Chinese Sovereign Wealth Fund will be stepping down. That replacement combines both economic and political considerations in ways that are both interesting from the perspective of Chinese internal power politics and for what it suggests about the evolving shape of Chinese sovereign investing.  Henry Sender, Founding president to Step Down at China Sovereign Wealth Fund, Financial Times, Jan 22, 2014.  

This change has been a long time coming. As reported by the Financial Times:

CIC close to deal on London business park
China poised to name head of CIC
Desperately seeking Chinese SWF chairman
China struggles to find wealth fund head
beyondbrics China’s CIC: change of the guard
IN Financial Services
Former SFO director may be called as witness in hedge fund case
Second surprise exit for El-Erian
Week in review, January 25
China criticises US SEC auditor ban

The Financial Times reported it this way: "The long-serving Gao Xiqing, who almost starved to death in the Cultural Revolution and went on to help found China’s first securities market, is to step down from the helm of the country’s $570bn-plus sovereign wealth fund, according to an internal memo.  Li Keping, chief investment officer, is set to take up the reins at China Investment Corporation as vice-chairman and president once the State Council gives the green light. Mr Gao, the founding president who turned 60 last year, will remain until then, according to one person familiar with the matter. " Henry Sender, Founding president to Step Down at China Sovereign Wealth Fund, Financial Times, Jan 22, 2014. "The leadership change is the second major shake-up in the leadership of CIC, after Ding Xuedong was appointed as the new chairman in July last year. His predecessor, Lou Jiwei, was named China's finance minister in March last year." Scott Murdoch, China's top sovereign fund names new chief, The Australian, Jan. 23, 2014).

Henry Sender nicely summarizes the difficulties of finding a replacement for Gao.  "Last year, a lengthy recruitment process – which saw several candidates reject the position – resulted in Ding Xuedong becoming chairman and chief executive." (Ibid). The reasons for this are well known--in the recent internal battles among leading financial elements within the state apparatus, there were strong fears that the Sovereign Wealth Fund  would be on the wrong end of blame for the repercussions of the expected economic slowdown in China.  (U.S. stocks tumble; Dow drops 318 points: Indexes post worst weekly losses in more than a Year, Market Watch, Jan. 24, 2014  ("U.S. stocks finished the week with deep losses as investors fled equities and emerging-markets currencies on concerns about a contagion effect from China’s manufacturing slowdown. ")).  That in fighting has suggested to some that the Chinese SWF complex is less relevant for Chinese economic development than it once was (Sender, supra).  It also suggested that the State Administration of Foreign Exchange (SAFE).
“SAFE is all that matters now,” says the head of one private equity firm that invests CIC funds, referring to the State Administration for Foreign Exchange which is responsible for almost all of the country’s reserves.

“In the beginning, there were unrealistic expectations both on CIC’s performance and its ability to do big deals,” says Chen Zhiwu, now a professor at Yale University who is on many advisory boards in China.

“They did not become reality. As a result, money which was originally expected to move to CIC from SAFE has not happened. They will keep CIC going but the expectations have shifted downwards.”

SAFE has recently taken over functions previously handled by CIC, including setting up a debt fund with the asset management unit of the International Finance Corp arm of the World Bank. It is also increasingly investing China’s trillions of dollars in reserves abroad itself.  (Ibid).
The move comes at a delicate time. China appears on the verge of pivoting its North American activities from Canada and a natural resources management strategy toward New York and a more strategic role in equities markets. "China's sovereign wealth investment fund is poised to launch a buying spree in global infrastructure projects and advanced technology companies after deleveraging in the US and European private sectors has run its course, its chief said." Ray Chan, Chief of China's wealth fund bullish on US private sector, South China Morning Post, China Business, Jan. 23, 2014 ("US companies in the areas of shale gas, manufacturing, and advanced technology are within our investment radar," said Ding, who took over at the sovereign wealth fund in July last year. "We plan to take a range of investments including private, direct, and alternative." Ibid).  This might include entry into the start up or mezzanine finance markets.  (Uber Could Use Sovereign wealth Fund Money, Sovereign Wealth Fund Institute, Jan. 7, 2014.)

Within China, Mr. Gao appears to have been his own worst enemy, or at least the victim of changing political tastes, and its consequences for advancement. The official unofficial version is well known: "A fierce intellectual independence and unwillingness to “play politics”, along with complaints that he is too “western”, are often cited by other senior officials to explain why he never advanced to much higher office." (Sender, supra). But more importantly, perhaps, was the consequences of his past.  At a time when Party building and ideological work is moving to the front of the agenda of the CCP, Gao's symbolic stance during the Tienanmen protests of 1989 might well have come to haunt him (Ibid). Of course, it could have gone the other way--Gao might have served as a symbol of transformation and symbol of the way in which the CCP had moved forward.  BUt there were likely too much history here to make that feasible.-  

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