March 13,2008

China Wants to Help Draft the SWF Investment Rules

By CSC staff

China has expressed its willingness to join the EU and the IMF in current negotiations aimed at drafting investment rules for sovereign wealth funds (SWF).

Yang Jiechi, Minister of Foreign Affairs said that the good use of SWF according to all international regulations should benefit all parties involved. He noted, however, that all stakeholders should work together to make the rules. The CIC "is operated in complete conformity with normal business operation models and is welcomed in many countries.’?span style="mso-spacerun: yes"> 

China has accumulated more than $1.5 trillion foreign exchange reserves and has created its $200 billion sovereign wealth fund, China Investment Corporation (CIC).

Wang Jianxi, CIC’s Deputy General Manager and Chief Risk Officer, has publicly agreed with Yang’s opinion. This is the first time that the Chinese government and the CIC have publicly shown their willingness to participate in the drafting of the international SWF investment rules. However, it seems that China still hasn’t decided how it will participate in the process.

There are now over 20 Sovereign Wealth Funds globally, with their total capital being somewhere between $1.9 and $2.9 trillion. Stephen Jen, an economist with Morgan Stanley, recently predicted that the SWF assets might soon surpass the total official foreign reserves held by central banks and become the main sources for capital investment. Jen said that the global SWF assets could grow to about $12 trillion by 2015, in large part due to a boom in oil prices and other commodities; most of the funds?growth is expected to come from Asia

The massive scale of these funds, most of them coming from countries in Asia and the Middle East, is causing concern in the US and Europe that these investments might be politically or strategically driven. The SWF have recently acquired sizeable stakes in the troubled banking industry in the U.S and EU, which have also been worrying developed countries.          

At the end of February, the European Union revealed that the European Commission received a proposal that would require global sovereign wealth funds to accept a voluntary code of conduct. The IMF is also in the process of creating a similar code. 

Presently, the countries making rules are mostly the ones that have been receiving investment from the SWF. Moreover, the assets in USD owned by sovereign wealth funds are mostly a result of trade surpluses with countries such as the US. The danger is that if the US and Europe set too many limits on the SWF investments, or refuse to involve the investors in the rule-making process, investors will feel that they are being treated unfairly.



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