SWF Radar ZBenAdvisors

The New York Times reports that, “After freezing withdrawals from most of its money funds in the wake of a panicky run on Sept. 15, the Reserve Fund mailed out checks on Friday to shareholders of its giant Primary Fund, returning half their original stake and promising substantial future payments as more portfolio assets are sold.”

The article discusses developments relating to the Stable Investment Corporation, a subsidiary of the China Investment Corporation (CIC), which has more than $5 billion frozen in the fund.

Bloomberg reports that, “China Investment Corp… may have as much as $5.4 billion frozen in a U.S. money-market account. Stable Investment Corp., an affiliate of Beijing-based CIC, was the largest shareholder in Reserve Primary Fund on Sept. 1, according to regulatory filings.”

The article quotes Michael McCormack of Shanghai-based Z-Ben Advisors Ltd as saying that, “I don’t think anyone in China can claim a lack of experience in what can go wrong with a money-market fund. I’m a little surprised that CIC would be invested in any money-market fund that carried a hint of risk.”

The Oxford International Review’s SWF blog has published an interview with the executive director of Shanghai-based Z-Ben Advisors’ Michael McCormack.

Among other things, he says that, “I think the initial response – the one that preceded study, dialogue or serious appraisal – was predictable: certain sections of the US legislative branch (and their think-tank armourers) sounding alarms, a consensus for caution expressed in the EU, Britain rolling out the welcome mat… Since early summer 2008, I’m pleased to see (as I’m sure CIC is) a more reasoned set of responses emerging.”

Michael McCormack, an executive director at Z-Ben Advisors, on Sunday had an article published at ChinaStakes.com that looks at China’s State Administration of Foreign Exchange (SAFE), compares it with the China Investment Corporation (CIC) in the context of foreign investment, and discusses some of the issues raised by SAFE’s acting as a sovereign wealth fund.

Among other things, the article states that, “While most foreign governments accept that their peers will buy and sell their sovereign debt as an exchange management tool, they are unlikely to accept the danger that SAFE (or, indeed, similar investors) might also be tempted buy or sell company debt, shares, fund or index positions as part of that effort. Such fears makes it unclear that SAFE could pass regulatory tests designed to bar or restrict investors who have currency management responsibilities.”

AsianInvestor writes that, “China's three sovereign wealth funds – China Investment Corporation (CIC), National Social Security Fund (NSSF) and China-Africa Development Fund (CAD) – are likely to outsource a combined $320 billion to foreign asset managers over the course of the next three years, according to a report by Z-Ben Advisors.”

It is noteworthy that the report’s authors identify three Chinese SWFs, and that one of the funds they identify – the NSSF – is generally thought of as, at most in this context, a sovereign pension fund, while the other – CAD – is not generally considered to be an SWF.

China is in fact generally considered to have just one SWF or – at most – two, with SAFE or its investment arm the SAFE Investment Company sometimes included alongside CIC.

CITIC and the China Development Bank (CDB) are also sometimes described as SWFs, although there are contexts in which this description certainly does not fit. It is also easy to imagine future contexts in which the likes of Jianyin Investment or the Central Huijin Investment Company, now folded into the CIC, are described as discrete SWFs, as they have been in the past.

Examples such as these once again suggest that it would be impossible to come up with a set of necessary and sufficient conditions for SWF status that would include all the types of sovereign investment vehicles that are regularly and justifiably described as SWFs while excluding funds that common sense dictates should not be included in any list of SWFs. This surely has implications for authors of SWF guidelines and codes of conduct.