Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions by Zongyuan Zoe Liu is a rather detailed book but a fascinating insight into the evolution of China’s financial policy and its strategic investments using leveraged foreign exchange reserves. The book argues that China has created a new type of fund, Sovereign Leverage Funds, created through the use of complicated debt instruments. Unlike Sovreeign Wealth Funds, they do not require a stream of profits from an activity such as the export of commodities. “SLFs are a political-economic innovation because they are the product of the state leveraging its political and financial resources to make it possible to capitalize a fund,” which can then be invested overseas for startegic geopolitical purposes – the BRI. The SLFs can influence their portfolio investments through the use of voting rights – or a threat of disinvestment.
The first part of the book traces the origins of the arrangements in CHina’s historic opening up and accumulation of massice foreign exchange reserves. The Asian Financial crisis of 1997 was a key moment in determining the leadership to ensure China built up massive reserves: “Awakened by the severity of the crisis, CPC leaders realised dor the first time that national security could not be narrowly defined only by military competences … but must also include financial security.” (I was in Hong Kong as a journalist for the IMF/World Bank meetings held there in September 1997 – an amazing experience.) The 2008 crisis was another key moment. The existence of the SLFs has allso given China’s state owned enterprises a ready source of finance for overseas acquisitions and infrastructure investment, putting them at an advantage compared to their competitors.
The book then sets out a detailed account of the SLFs and their evolution through to the post-Covid period. It argues that liberal market economies should follow China’s example and set up their own SLFs to “act as white knight investors to defend strategic industries from unwanted foreign takeovers.” Challenges like investing in the green transition will require leverage, it argues. Such funds are institutions between state and market and “can be powerful tools for the practice of financial statecraft.”
There are loads of interesting details. For instance I had never realised that many of the cities authorised to be new economic zones after April 1990 were former treaty ports: “From the perspective of the Party, its revivial of China’s former treaty ports conveyed a message to the Chineses people: only the Party was capable of leading China’s broader economic revivial and redeeming the country from its prior century of humiliation.”
I know far too little about either international finance or Chinese politics to evaluate the book’s argument, but it seems reasonable. It also seems to be a rosy perspective, given what one reads about over-leverage domestically and problems with some BRI investments. As ever, the capacity of the CPC to take a strategic view is striking – especially in a country that sometimes seems governed from tweet to tweet. I’ve argued in a recent article for the use of long-term vehicles like soveriegn funds or investment banks to institutionalise learning in economic policy. I found the book fascinating and will look forward to reading some reviews by readers who do have the right expertise.
I’ve been a bit unwell this week so have been relaxing with not one, not two, but three detective novels – Chief Inspector Chen in the series by Qiu Xiaolong set in Shanghai. They’re hardly action packed but they have a lot about Chinese politics and also the fabric of everyday life, including food. Fascinating.
One of this week’s [amazon_link id=”1473616786″ target=”_blank” ]Don’t Cry, Tai Lake[/amazon_link] has a plot about environmental activism against industrial pollution. Whatever China’s GDP growth has been – much disputed – it has been fast enough to have exacted a serious environmental cost. Inspector Chen reports back to his Party patron: “I focused my research on issues of the environment. … Pollution is so widespread that it’s a problem all over China. To some extent, it’s affecting the core of China’s development with GDP-centred growth coming at the expense of the environment. It can’t carry on like this, Comrade Secretary Zhao. Our economy should have sustainable development.”
I’ve been working on a paper on the political economy of economic statistics, for a conference in 10 days. Many, many people would agree with Chief Inspector Chen, and not just about China, but it’s hard to move from GDP-centred to something else centred without a consensus about what the something else should be. Perhaps China could assist the political economy of such a transition given its need for a measure that can show increasing economic welfare without costing the earth.
[amazon_image id=”1473616786″ link=”true” target=”_blank” size=”medium” ]Don’t Cry, Tai Lake: Inspector Chen 7 (Inspector Chen Cao)[/amazon_image] [amazon_image id=”1473616808″ link=”true” target=”_blank” size=”medium” ]Enigma of China: Inspector Chen 8 (Inspector Chen Cao)[/amazon_image] [amazon_image id=”1473616824″ link=”true” target=”_blank” size=”medium” ]Shanghai Redemption: Inspector Chen 9 (Inspector Chen Cao)[/amazon_image]
Like all thinking economists, I’ve been fascinated by the transformation of China in our lifetimes and the implications of its emergence as a major economic power. Although no expert, I’ve read quite a lot of the popular books on the country and its economy. Many fall into the hype trap – either China will take over the world, or it will experience a terrible setback because of the many challenges of rapid development on a huge scale.
My favourites have been the books of reportage such as Leslie Chang’s [amazon_link id=”033044736X” target=”_blank” ]Factory Girls[/amazon_link] or Richard McGregor’s [amazon_link id=”0141975555″ target=”_blank” ]The Party[/amazon_link] or even Fuschia Dunlop’s [amazon_link id=”0091918324″ target=”_blank” ]Shark’s Fin and Sichuan Pepper[/amazon_link]. I’m also looking forward to Danny Quah’s forthcoming book on global economic hegemony in the post-US unipolar world – he recently posted this online.
Meanwhile, this week I’ve read one of the best books so far about the drama of China’s journey – in my lifetime – from the brutality of the Cultural Revolution to the cultural and political as well as economic and social tensions of a society whose average living standards have doubled every seven years but very unevenly distributed. It’s Jianying Zha’s [amazon_link id=”1595588809″ target=”_blank” ]Tide Players: the movers and shakers of a rising China[/amazon_link].
[amazon_image id=”1595586202″ link=”true” target=”_blank” size=”medium” ]Tide Players[/amazon_image]
It’s a slim book, a series of essays focussing on certain individuals in the business and in the cultural worlds. Ms Zha has lived her adult life between China and the US, having grown up with a family sent to work on a farm out of Beijing during the Cultural Revolution, and having made her way out via university as soon as the climate began to change. The dual perspective is illuminating. I particularly enjoyed the chapter about economist Zhang Weiying’s proposals for reforming Beijing’s university – some of the description of the controversy could have been applied verbatim to the UK context. “Like a typical economist, he marches stridently by the logic of the market and tries to turn the university into an efficient production line, a lean and mean academic market. … He sees running the university essentially as a management affair, not a supple and subtle art which requires, among other things, tolerance and the ability to recognize idiosyncratic geniuses who don’t fit a cookie cutter plan.” Are there any universities even in the US that really march by the logic of the market?
The book also furnished me with a bunch of new-to-me Chinese proverbs. My favourite: “When there is policy from above, there is always a way of handling it on the ground.” Also: “Dropping a stone on someone’s head after he falls into a well.” (Equivalent obviously to kicking someone when he’s down.)
It’s beautifully written and illuminating about debates within China, rather than the western debate about China. Highly recommended.
A while ago I reviewed Jonathan Fenby‘s [amazon_link id=”1847394116″ target=”_blank” ]Tiger Head, Snake Tails[/amazon_link], which I liked because its answer to the question about China’s prospects for economic and geopolitical success is essentially ‘it depends’. It’s a rare book that gives an effective overview while resisting the temptation to be either a China-booster or China-basher. I’ve now read another China book that probably falls into the latter camp, Timothy Beardson’s [amazon_link id=”0300165420″ target=”_blank” ]Stumbling Giant: The Threats to China’s Future[/amazon_link].
[amazon_image id=”0300165420″ link=”true” target=”_blank” size=”medium” ]Stumbling Giant: The Threats to China’s Future[/amazon_image]
The author would surely describe it as China-realism though. It is certainly more nuanced than some others, pointing to the country’s amazing recent achievements. He lives in Hong Kong and has done business in China for decades. The book is full of interesting and informative detail and insights. For example, in the chapter on the knowledge economy, I learned that plagiarism is a pervasive problem in the Chinese academic world. One biologist, Fang Shimin, documented 500 cases of plagiarism in his field in one year, 2007. A professor named as a culprit arranged for criminals to attack Fang with a hammer. Beardson goes on to claim that while plagiarism is a global problem, the culprits in other universities are often Chinese, citing a consultancy to US universities advising clients to expect half of all Chinese applicants to submit forged transcripts. Of course I haven’t done any additional research into Beardson’s figures but this is indeed an interesting perspective on the capacity of the country’s education system to turn out creative, innovative thinkers. Another example – the description of an increasing number of incidents of large-scale public violence in the past 20 years, including more very large scale incidents, albeit against the background of very high (80-80%) support for the government and belief the country is heading in the right direction.
The book runs through a series of important challenges facing China’s leaders: its ‘broken’ economic model (other authors might dispute that description of course); the elusiveness of the knowledge economy; a fragile financial sector distorted by state intervention in lending; the absence of adequate social welfare; adverse demography; environmental degradation and pollution; civil stability; the future of the Communist party; the geopolitics of east Asia and relations with the US; ethnic unrest in central Asia; the battles in cyberspace. That’s quite a list – it’s a chunky book covering lots of ground.
Can they be overcome? Beardson concludes: “Many of the challenges which China confronts appear to an international audience to have clear solutions. However, they must be viewed in the context of a government which is driven by the desire to stay in power and yet has a sense of fragility. Many obvious policy solutions are avoided as they carry political costs or risks.” He thinks it “inconceivable” that China will overtake the US this century. The challenges have solutions but these will not be implemented. I found it impossible to assess this ultimately political judgement.
What does seem clear is that events in China will be – one way or the other – extraordinary. If you’re interested, this book is a very welcome addition to the collection of well-informed perspectives on a country that has unavoidably become part of our future. ‘[amazon_link id=”0300165420″ target=”_blank” ]Stumbling Giant[/amazon_link]’ is an apt title: it’s an alarming prospect and it could take some nimble footwork from the rest of us to avoid collateral damage.
It wasn’t until reading Jonathan Fenby’s [amazon_link id=”1847394116″ target=”_blank” ]Tiger Head, Snake Tails[/amazon_link] that I realised how polarised some of my previous reading on China had been. While I’ve read some superb reportage/analysis such as Leslie Chang’s [amazon_link id=”033044736X” target=”_blank” ]Factory Girls[/amazon_link] and Richard McGregor’s [amazon_link id=”0141975555″ target=”_blank” ]The Party[/amazon_link], there is definitely a strain of the literature that is either ‘China will conquer the world’ (eg Martin Jacques in [amazon_link id=”0140276041″ target=”_blank” ]When China Rules The World)[/amazon_link] or ‘China is doomed’. Mr Fenby is an experienced journalist – a former editor of the South China Morning Post – and the extent of his knowledge about the country is clear on every page.
[amazon_image id=”1847394116″ link=”true” target=”_blank” size=”medium” ]Tiger Head, Snake Tails: China Today, How it Got There and Why it Has to Change[/amazon_image]
As always, the scale of anything about China is staggering – to give just one example from the book, China’s foreign exchange reserves in 2011 were enough to buy Italy; or all of the sovereign debt of Portugal, Ireland, Greece plus Spain, and also Google, Apple, IBM and Microsoft and all of the real estate in Washington and Manhattan, and the world’s 50 most valuable sports franchises. There are lots of fascinating insights too. I was struck by the information on market structure – many markets have a few state giants but are otherwise highly fragmented and regionalised. There are 121 very large state firms, another 114,400 smaller state owned enterprises, and a vibrant competitive fringe. In retail, the very biggest firms have less than 6% of the market each. Rare earth mining – surely somewhat capital intensive? – is carried out by small family-owned enterprises. Of the half million food producers, 80 per cent have fewer than 10 employees. The book has other interesting insights. For instance, China excels at individual sports – golf, table tennis, gymnastics – but fares poorly at team sports.
Like many commentators, Fenby highlights the enormous challenges facing China as it makes the transition from relying on cheap, abundant labour to drive rapid export growth and infrastructure (often debt funded) at home. These include the political conundrum of how the Communist Party will try to keep control – and whether it will succeed – and the enormous demographic challenge. He writes about the endemic corruption and absence of trust, the environmental horrors, the need for better social welfare including ending the distortions created by the ‘hukou’ system of residence permits. However, the book does not despair. All countries face difficult transitions at various points in their history, and China also has great resources for addressing the challenges. Tiger Head, Snake Tails is a cracking read, and I really like its injection of nuance into the debate we in the west have about China.