SWF Radar

The Times writes that, “China’s secretive sovereign wealth funds will help its state-owned companies to expand overseas in a shift of strategy after economic talks with America [led on the American side by Henry Paulson], according to analysts in Shanghai. … Sovereign funds will assist inexperienced Chinese companies in financing, foreign-exchange risk management and handling trade barriers.”

According to the article, China agreed in its negotiations with the US to open its capital markets further to foreign institutional investors, its aim being to “secure reciprocal treatment to smooth the way for its own companies to build up their foreign holdings.” Such reciprocation would free up China’s SWFs, through supporting Chinese companies, to become “indirect owners of big stakes in troubled financial institutions such as Lehman Brothers as they step up the pace of investment abroad.”

Certainly this focus on supporting companies, which must surely mean SOEs, in their expansion abroad adds an extra degree of political manipulability to Chinese SWFs. Brad Setser, in a post on his blog yesterday, mentioned this problem, writing that, “It is hard to see how a government fund that has to choose to finance the overseas ambitions of some Chinese companies and not others could be insulated from domestic political pressure.”

Yet it is hard to see how any fund that answers only indirectly, if at all, to investors or (in the case of pension funds) members could ever be free of the threat of political manipulation, be it in the form of SRI or something more sinister, regardless of the path its investments take.

The Montana Board of Investment’s (MBI) March 2003 decision, made in a regular board meeting, to pull all its French investments is an example of a particularly sinister form of political investing or, in this case, divesting. I just looked up the minutes of that board meeting, and some of the best lines are worth sharing.

The MBI’s decision came after a pension fund member had moved “that the Board sell all French company stock and not purchase any more French stocks until such time as a future Board determines that France has proven it is a friend of the United States again.” The inspiration for the member’s move was apparently “a statement made by President Bush following the ‘9/11’ terrorists attacks that ‘you are either with us, or with the terrorists.’”

The board thereafter managed to convince itself that it would not be in breach of its fiduciary duties if it divested in France since (in the words of one board member), “[T]he backlash [against France] could be significant. The media has reported French goods not being purchased; French wines not being purchased, Evian water not being purchased. People are protesting against the French. There is a risk in holding French company stock.”

The decision to divest, which was reversed in October of that year, is reported to have cost the MBI’s members $4mn.

Looking at the Times article again, it is interesting, given the general focus in the media on the China Investment Corporation (CIC) as the face (quite literally) of Chinese sovereign wealth, that it focuses primarily on the State Administration of Foreign Exchange (SAFE) and refers to the CIC as the “smaller Chinese sovereign fund.”

UPDATE (June 22): Brad Setser has posted a response to the Times article.