Their economies battered by a string of crises, Japan, the United States and nations in Europe have pinned their hopes on China, with its vast reserves of foreign currency, for investment.
To get a better grasp of the situation, The Asahi Shimbun interviewed Gao Xiqing, president of the China Investment Corp., a Chinese sovereign wealth fund at the vanguard of such activity. The CIC manages a portfolio of $400 billion (about 32 trillion yen).
Will Chinese money be the world's savior, or does it pose a threat in that it could be used to buy up industries and corner the market for certain resources on a global scale?
Excerpts from the interview follow:
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Question: When heads of state visit Beijing, it seems to be a matter of course that they leave with pledges of Chinese investment. That said, there is persistent concern that the Chinese sovereign wealth fund can be a threat as it serves as an agent of China, where the Communist Party holds a monopoly on political power.
Gao: I think that perhaps many countries have not adapted to China's sudden rise, or perhaps I should say that they've developed somewhat mixed feelings about it. It appears to me that some people in developed countries have become more timid than they need to be and look at China warily. But be that as it may, China's people should not start to feel that the world needs their money and be arrogant about it, because otherwise they may quite well let valuable investment opportunities slip away, on top of hurting China's image.
Q: To begin with, little has been known about the inner workings of China's sovereign wealth fund. Is that where the threat theory derives?
A: There are certainly people with a biased view. They think that the CIC wants to dominate the recipients of its investments and control management. But we are investing according to the basic principles we decided on when we established our fund. We invest for commercial purposes, aiming to earn returns over the long term. We're not considering things like replacing management or firing employees to send over Chinese workers.
Q: So you're not acting at the whim of the Chinese state?
A: We are the only company in China under the direct control of the State Council, but it doesn't interfere with us, telling us to buy this or not buy that. An example is when we invested $5.6 billion in Morgan Stanley, a major U.S. financial institution. A member of the Chinese leadership who knew about it from the news on TV called me up and said, "What's all this about investing such a huge amount of money? There's never been such an enormous overseas purchase in China's history!"
Q: You didn't report it?
A: Reports are generally made a few hours before an announcement. Government leaders are always busy and sometimes they don't look at the reports. This person contacted me again a few days later and said, "I simply wanted to check the facts, not to approve or disapprove the investment. You can make investments on your own responsibility." Our investments include so many things, I can't ask the government's opinion for each and every one.
Q: But many executives come from institutions such as the National Development and Reform Commission, the ministry of finance, the ministry of commerce and the central bank.
A: They're only involved in major policy decisions two or three times a year. They have nothing to do with daily portfolio management.
I'm often asked whether we make many investments in resources at the behest of the national government. But we do this because we think that these are good investments, just as Japanese trading companies hold many overseas interests in oil and natural gas. Trading companies don't make their investments after receiving instructions from the Japanese government, do they?
Q: Every move the CIC makes is closely watched. In early May, you made world headlines when you said you won't buy any more European government bonds.
A: That's not what I said. My statement meant that we will not limit our investing in Europe to government bonds and we will seek out other opportunities. Europe will continue to be an important investment destination. Is there any place which is completely free from risks associated with the European sovereign debt crisis and absolutely advantageous to investors?
Q: It is reported that the CIC, along with a Belgian government-affiliated fund, is going to create a euro-denominated investment fund. I've heard that the new fund will invest in mid-sized European firms entering the Chinese market.
A: One reason the CIC was created is to diversify options for investing China's foreign currency reserves, most of which are denominated in dollars. In 2010, we had more than 40 percent of our overseas investments in North America, 30 percent in Asia, over 20 percent in Europe, 5 percent in Latin America and 1 percent in Africa. Broken down by industry, 17 percent was in finance, 13 percent in energy, and 12 percent in materials. Real estate accounted for 5 percent. We make changes little by little every year, but not big ones all of a sudden.
Q: The term, "Washington Consensus," refers to the situation where rules set by the United States will control the global economy. A new term, "Beijing Consensus," has been coined as an alternative.
A: The rules governing the global economy now were built from compromises made by Western countries, which developed their economies earlier. However, the growth of newly-emerging nations has diversified the global economy. An American model is no longer accepted by all. Chinese people sometimes think that a Chinese model is right. I believe both should show mutual respect and learn from each other. That's how international order has been created throughout history.
We, Chinese people, think that for the past 100-plus years, foreign countries have been bullying us and ridiculing China the whole time. Yet, in a couple of decades since China initiated its economic reforms, we've been running full steam ahead while the West has had an economic crises. Suddenly, we've started to feel that we're getting ahead, and that gives us confidence. This is a good thing to the Chinese. But there's a good and bad side to everything.
Q: So what's bad?
A: We're starting to see Chinese who say that China has become a major power and that the ride is over for the United States, and they think we can say "no." But I wonder. If you take an objective look, the United States is still the world's most powerful country. Its people's open character, in addition to the country's scientific, technological and cultural influence, attracts people from around the world. If we carelessly assume that the one running in front of us is in decline because they've slowed down, then we may very well stop putting out the effort to get ahead. Look at the Roman empire. You can't talk about the rise and fall of great powers in terms of one century.
Q: You studied in the United States, passed the bar exam there and worked at a Wall Street law firm, right?
A: The first time I went to the United States was in 1982. I kept bumping my head into store windows. They were so clean that I couldn't see them. Of the more than 500 employees at the CIC now, 80 to 90 percent of those in the investment department have been educated in the United States or worked there. We even have quite a few Chinese people with American citizenship. Chinese companies have already changed a lot.
Q: The CIC is also investing in infrastructure in Western countries, such as power and water utilities. If you did the same in Japan, public opinion might be mixed.
A: Yes, we probably wouldn't feel a huge welcome. There are things about Japan that are completely different from Europe or Africa other than our bilateral relationship and public sentiment in Japan.
Q: Will you elaborate?
A: The difference is that, fundamentally speaking, Japan is not really lacking in money. That's why we understand that the attitude there is, "We don't want to take any investments from abroad if we can avoid it." But I think Japan should accept foreign capital and labor to return to growth.
Q: What are your prospects for the Japanese economy?
A: The outlook isn't very clear. I'm much more optimistic than my colleagues. But currently my colleagues have unfortunately been more accurate than I.
Q: Why are you optimistic?
A: In my late teens, right in the middle of the Cultural Revolution, I was involved in the construction of a railway near Xian. There were huge Isuzu trucks, loaded up with freight, with such high performance that Chinese brands couldn't compare. And the bulldozers we used to cut paths through the mountains were Japanese-made. Later, when I went to a Beijing university to study international economics and trade, I often read documents from Nomura Research Institute. The serious attitude in Japan, which industrialized before China, made an impression on me.
Japanese are too pessimistic. They say they don't have any creativity, but I don't think so. Take disposable body warmers for an example. They have developed various types of products to meet diverse needs, such as warming up the insides of cold shoes. They keep hanging on and come up with something new even in fields where the market appears to be saturated and people think there won't be anything new. I think they should be proud of their creativity.
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Gao Xiqing was born in 1953 and earned his Juris doctorate from Duke University in the United States. After serving as deputy chairman of the China Securities Regulatory Commission and deputy chairman of the National Council for Social Security Fund, Gao became the first CIC president in 2007.
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China Investment Corp.
The CIC was established in 2007, when China's foreign currency reserves exceeded $1.5 trillion (about 120 trillion yen), to diversify their investments and increase profits. The CIC's investment recipients include major U.S. financial institutions, Canadian resource development companies and a British water utility. Such a government-affiliated fund that invests money from foreign currency reserves, oil revenues and the like is called a "sovereign wealth fund" (SWF). Middle Eastern oil-producing states have established SWFs since the 1970s while other Asian countries have gotten into the game more recently, bringing the total number of funds to more than 30.
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