CFR Fellows' Book Launch Series: Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions by Zongyuan Zoe Liu

Tuesday, June 27, 2023
Thomas Mukoya/Reuters

Fellow for International Political Economy, Council on Foreign Relations; Author, Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions; @ZongyuanZoeLiu


Vice President, Deputy Director of Studies, and Nelson and David Rockefeller Senior Fellow for Latin America Studies, Council on Foreign Relations; Author, The Globalization Myth: Why Regions Matter; @shannonkoneil

One of the keys to China’s global rise has been its strategy of deploying sovereign wealth on behalf of state power. Since President Xi Jinping took office in 2013, China has doubled down on financial statecraft, making shrewd investments with the sovereign funds it has built up by leveraging its foreign exchange reserves. Sovereign Funds tells the story of how the Communist Party of China became a global financier of surpassing ambition.

In Sovereign Funds, Zongyuan Zoe Liu offers the first in-depth account of the evolution of China’s sovereign funds, and shows how these institutions have become mechanisms not only for transforming low-reward foreign exchange reserves into investment capital but also for power projection.

The CFR Fellows’ Book Launch series highlights new books by CFR fellows.

O’NEIL: Well, good evening, everyone, and welcome to the Council on Foreign Relations. I’m Shannon O’Neil. I am vice president of Studies and the Nelson and David Rockefeller senior fellow for Latin America studies.

And I am joined here by Zoe Liu, who is our fellow for international economic policy. And we are here today to talk about, and indeed to celebrate, the publication of her new book. It is Sovereign Funds: How the Communist Party of China Finances Its Global Ambition(s). So a small topic. (Laughter.)

We will get to it. First, she and I will have a conversation up here for the first half-hour. I’ll be asking her about the book. And then I invite you here in the room and you online to ask your questions. I know there’s almost 175 people between in person and online. I’m sorry for those who are online because they don’t get to have the nice reception afterward, but I hope you’ll raise a glass and toast to Zoe and her new book. And so, with that, let’s get started.

LIU: Sure.

O’NEIL: So before we dive into the meat of the book, I would like to ask you first where this idea came from. How did you get interested in China’s sovereign wealth funds?

LIU: Yeah. Thank you very much, Shannon. And before I answer that question, I would want to thank everybody for coming today because I was really worried about the weather over this past weekend. (Laughter.) I was like, you know, Zoe, hey, actually, I’m in the restaurant business, you know, so that I’m worried about how weather is going to show up—(laughter)—is going to impact people’s turnout. And for those who are—who are here either in person or online, I’m really grateful. Thank you so much.

And in terms of the question, I would have to go back to when I was in school. Before I got interested in the whole, you know, sovereign funds, international finance, capital flow, I was really interested in energy. I wanted to study cross-border pipelines because I grew up in an era where China experienced this dramatic change from being a net energy importer—being a net oil-exporting economy, and then suddenly changing into importing, and becoming one of the largest commodity importers in the world. So I was curious, you know, to what extent energy import is going to import China’s economic trajectory. And then, from there, I realized: Wait a moment. You know, all these Gulf economies, they export so much energy, and how are they going to recycle petrodollar? That’s where I dived into, oh, OK, so how the entire petrodollar system—petrodollar recycle system works. And that’s related to, you know—some of the study is related to de-dollarization.

And then from there I also got into, oh, you know, these countries have this massive amount of money being deposited in so-called piggybanks, sovereign wealth fund. And guess what? China has a sovereign wealth fund, known as the CIC—you know, China Investment Corporation. So I asked myself: Wait a moment. Well, you know, why China being a massive energy-importing economy, does not necessarily have the capacity to monetize natural—God-given natural resources, become one of those countries that have a sovereign wealth fund?

So that’s how this all got started. And I was—I’m very grateful that my Ph.D. dissertation advisor, Professor Kent Calder and David Lampton and Professor Erica Jones (sp) and John Lipsky, they encouraged me to pursue this route.

O’NEIL: That’s great. OK.

So you dive into sovereign wealth funds. You find that China has sovereign wealth funds and they’re a little bit different than the sovereign wealth funds in the Middle East. So why don’t you lay out your main arguments? What did you find when you started looking into these funds?

LIU: Thank you, Shannon.

So this—it’s a little bit provocative, you know, since I basically argued in this book China’s sovereign funds—not sovereign wealth fund; there is a reason why it’s a sovereign fund, not a sovereign wealth fund. The reason I argue that China’s sovereign wealth fund is different—is different from a sovereign wealth fund is that they are leveraged in a sense that in the creation of all the—all the Chinese government-owned—(inaudible)—institutions, it involves the use of either implicit or explicit leverage. The idea of implicit leverage really is about, you know, changing the risk profile of foreign exchange reserves and to—without really expand the government balance sheet, whereas the explicit aspect, you know, it’s explicit. In the case of China Investment Corporation, when—in the creation of the CIC, the Ministry of Finance actually issued eight batches of special-purpose bond and used the proceed(s) to purchase foreign exchange reserves from the PBOC. So from that perspective, you know, there is not just a change of the composition of, you know, foreign reserves assets, but also the expansion of government balance sheet. So I—basically, in the book I argued these are the so-called sovereign leveraged fund.

O’NEIL: So give us a sense of the scale. How much money is in these various funds?

LIU: So the—when CIC was established, CIC—

O’NEIL: We’ll talk about each of the funds, but just give us a sense of how much money is there. Is it—is it 500 million, is it a billion, is it a trillion? What size are we talking?

LIU: In terms—adding all these together, there is a rough—a conservative estimation put the number in terms of total asset(s) under management would be around somewhere between $2 trillion to $3 trillion.

O’NEIL: So 2 (trillion dollars) to $3 trillion. And—

LIU: And that are not, you know, recorded on China’s foreign exchange reserves statistics.

O’NEIL: Interesting.

And so—and when you think about your argument—and you know, your title here is How the Communist Party of China Finances Its Global Ambitions. So tell us a little bit about its global ambitions and how these—and what they used this 2 (trillion dollars) to $3 trillion to do.

LIU: So in terms of the Communist Party’s global ambitions, obviously, the changes. (Laughs.) And the first aspect of the global ambitions start at home; everything—you know, the same as this country’s foreign policy start(s) at home. And obviously, the first priority of China’s sovereign funds, which I call sovereign leveraged fund, really started with how China wanted to secure domestic financial security, and that dates all the way back to Asian financial crisis. And you know, ambition to strengthen China’s financial security, hence national security, the other aspect of it really is to finance the government priority in terms of industrial policies, in terms of secure access to overseas critical minerals or natural resources. And you know, current stage we are really talking about helping Chinese companies as well—you know, startups, tech companies—to advance or develop there. The government prioritizes strategic or frontier technology.

O’NEIL: So in the book you talk about sort of three big funds, and I want to go into each because, one, you’ve done so much research. You’ve interviewed dozens and dozens of people in these different funds. And it’s really interesting because it’s not just one sovereign wealth fund or leveraged funds; there is a series of them. So let’s talk about each since there’s a chapter on each, and let’s start with the first one, so the Central Huijin. Talk a little bit about its origin and what it has done in China or abroad.

LIU: Sure. So for some of our audience here, you probably—you probably have either interacted with Central Huijin or worked with some of those folks, right? So Central Huijin really is this institution established back in the early 2000s for the purpose of saving Chinese banks. At that time, Chinese banks was hurt by chronically accumulating non-performing loans, to the verge of insolvent. So in order to capitalize or recapitalize China’s banking system, the government decided that, well, you know, the Ministry of Finance really did not have enough money to capitalize all these banks despite the Ministry of Finance is supposed to be the institution in charge of all the banks. So, basically, what ended up happening was PBOC stepped in—the central bank stepped in—and used foreign exchange reserves to capitalize these institutions. Supposed to be a temporary, special policy vehicle to recapitalize the bank(s). And then, once—it’s the same as in this country or elsewhere—once the institution getting established, they take on their own life—a life of their own.

And as Central Huijin evolved, it now really becomes the chief—the chief of every major Chinese financial institutions. You name it, from China Development Bank or the Export and Credit Insurance company, and so on and so forth—or, for that matter, the four major state-owned commercial banks.

O’NEIL: And because they are investors in these instances or in these various institutions? Or how do they influence all of—all of these?

LIU: Right. So Central Huijin, really, it becomes this buffer or a (bail ?). Rather than having the government directly intervene in the market either to save the banking system or stave the stock—the stock brokerage firms, really you have Central Huijin as this market-oriented or market-faced institution representing the Chinese government as well as the Communist Party to shape how these funds are behaved in a sense that—or, if you read Central Huijin’s own statement, they actually do put in writing the mission is to represent the government, demand financial security as well as other government-prioritized strategic orientation.

And for that matter, Central Huijin’s on the record saying that, you know, it’s really more domestic-based; it does not directly participate in overseas investment and all that. But if Central Huijin is the largest share of—largest shareholder of all the major commercial banks, or for that matter China Development Bank, it seems that through Central Huijin’s capitalization of all these financial institutions, it—although it does not directly involved in overseas finance or mergers and acquisition, it actually provide a conduit for them to operate overseas.

O’NEIL: Let’s talk about the second one. So this is the China Investment Corporation, the CIC. So talk a little bit about its origin and how it’s evolved.

LIU: Sure. This is going to be daunting, because this audience is a daunting audience in the sense that many of you, especially from the Treasury or FTC, probably have worked with them, especially when you are engaged in, you know, the financial crisis and all that. (Laughs.)

And the origin of China Investment—China Investment Corporation really started from the broader debate inside China because of the preexisting success—relatively successful experience with Central—with Central Huijin. They realized: Oh, you know what achieved; we can really do this well. And they decided because of—because right around that time with accumulation of China’s foreign exchange reserves. Remember, after Asian financial crisis the Chinese policymakers really started to accumulate foreign exchange reserves and accumulate fast, and within five years in the immediate term of Asian financial crisis China’s foreign exchange reserves increased by more than 50 percent. So—

O’NEIL: Give us a sense of those numbers, just sort of the size.

LIU: So by the moment—by around 2011 China’s foreign exchange reserves reached more than $3 trillion and in this bigger context Chinese policymakers started to ask themselves questions. What is the opportunity cost of invest all our foreign exchange reserves in the low-yield U.S. Treasurys. (Laughs.)

So, you know, in between—in between 2003 and 2006 China had this major domestic debate. It started with a group of scholars and some of those even write articles on Reuters and you can check those, you know, in investor media. The idea is that, well, you know, the opportunity costs of having us—having Chinese foreign exchange reserves invested in U.S. Treasury bills seems to be quite big, and they started to promote the idea.

Even people inside SOV (ph), inside a lot of Chinese—including some of the Chinese financiers they started to promote the idea that China really need to diversify foreign exchange reserve management and use the foreign exchange reserves to invest in strategic assets overseas and at that moment China’s conceptualization of a strategic asset really was mostly in oil and gas and the critical minerals.

O’NEIL: And so this is sort of 2007, a great time to just be pouring into the markets. So how were those first years for the CIC?

LIU: No, Shannon, that’s a really sharp observation. Yes, you know, the timing of the CIC established or the first debut in the global market the timing was really not ideal or terrible because, you know, on the one hand, yes, they probably did not—the same as many brilliant Nobel Prize winners—economic prize winners they did not really see, you know, the coming of the global financial crisis and then at the same time the deals of CIC’s first debut to Western financial market was also suspicious in the sense that, you know, they agreed to invest in—make a pre-IPO subscription of Blackstone and immediately after the CIC’s pre-IPO subscription, you know, the founders, Mr. Stephen Schwarzman and Peter Peterson collectively so—

O’NEIL: Great Council members, yes. (Laughter.)

LIU: Great Council members. Thank you very much for contribution as well. But, you know, they made something very curious because, you know, Finance 101 basically tells me, hey, you know, you do not sell your shares if you think it’s undervalued. But, yet, obviously, CIC made a pre-IPO subscription. Those two founders, you know, sold some of their shares, which is questionable.

However, you know, yes, you know, the timing, honestly, I’d say, the early stage of investment into U.S. financial market not necessarily good news, especially from a paper value perspective. But it does give the CIC much needed access to financial talents, investment expertise, as well as access to key U.S. policy influencers such as Mr. Schwarzman.

O’NEIL: (Laughs.) So let’s put on the table the third of the funds. So this is the funds with State Administration of Foreign Exchange, or SAFE. We can run with that. It’s a little easier to say. So talk a little bit about the origin of this one, why it’s—you know, why it was developed and why it’s different than the others.

LIU: Sure. You know, SAFE—the State Administration of Foreign Exchange, you know, or short for SAFE, the idea really should be running foreign exchange reserves as a SAFE. The idea is really you do not want to do risk taking. And SAFE as an institution, it’s part of the overarching PBOC—Chinese central bank institution. And the moment when SAFE started to act a little bit less safe would be the moment when, you know, the very, very well-respected Chinese central banker Governor Zhou Xiaochuan—remember earlier we mentioned that 2011 Chinese foreign exchanges surpassed $3.1 trillion. For the first time, Mr. Zhou came out and made a speech saying that, you know, probably we need to seriously consider how to diversify China’s foreign exchange reserves and he mentioned the model of China Investment Corporation, and starting from there we gradually realized, oh, actually SAFE has reestablished not just the four early stage of overseas investment companies in Hong Kong or in Europe, in London but it has also been used to capitalize a lot of the initiatives under President Xi’s Jinping’s era, for example, the Silk Road Fund.

So, you know, the activism of potential—of Silk Road—of SAFE really, again, goes back to the bigger context of foreign exchange reserves diversification but it also fits in the bureaucratic competition between SAFE or minister of finance and the PBOC. The whole idea is, well, this money is supposed to be mine, I’m supposed to be managing it, and yet you stole $200 billion away from me. So there is this kind of, you know, bureaucratic competition aspect there as well.

O’NEIL: So let’s talk a little bit about that. As you look at these three different groups, I mean, often—sometimes in the Western media the views is that, you know, China is very centralized. It’s very top down, it’s controlled. And, you know, so we have these three funds. We have, you know, you said somewhere between 2 (trillion dollars) and $3 trillion there. Do they all stay in their lanes? What are their lanes, if you had to define them, and do they all stay in them or how do they interact with each other?

LIU: That’s a fantastic question, Shannon.

I would say, you know, after theories of the—theories of restructuring, in many ways, you know, CIC went—since its establishment it went through a restructuring and the very first experiment of China leveraging foreign exchange reserves was with the Central Huijin and the Central Huijin, once the CIC was established they announced Huijin was put under CIC.

But they started to manage it very differently in the sense that when you talk with the IMF people and in particular when CIC represented itself at the international stage they wouldn’t make it very clear, saying that, you know, really at the international stage the CIC only talk about itself as the international investment.

In other words, there is a strict firewall in between how Central Huijin was operating, how Central Huijin is investing at home versus how CIC—broadly speaking, CIC international—operate in Western territory. And in the context of SAFE it seems that when you look at their portfolio holdings they are very much in sync in the sense that, you know, when CIC was investing a lot in oil and gas at that time SAFE was not as active.

But when CIC started to move towards the strategic aspect of funding, trying to finance China’s technological advancement, helping COSCO secure overseas port and sea lanes and all that. SAFE has been doing something very much similar.

So from that perspective, yes, there is the internal bureaucratic inside but then at the same time if we look at the personnel the senior management in particular they have to be appointed or approved by the party’s HR department. So from that perspective, yes, bureaucratic inside but, after all, they represent—they are appointed by the party to represent fundamentally the party’s interest. You need to get promoted and keep their job as well. (Laughs.)

O’NEIL: So let’s talk a little bit about the consequences or sort of the successes of these. So one would be economic, right. You said one of the rationales for these was we want to diversify. We don’t want to just be in, you know, low-interest Treasurys. We want to, you know, make better returns. But we also want to, you know, have access to strategic resources and the like.

So if you look just on the pure economic side how successful have China’s sovereign funds been?

LIU: So in terms of economic—purely looking at the economic returns for all the funds, I would say let’s take a step—let me take a step back, you know, looking at the CIC, and because of the stricter firewall in between domestic investment versus foreign investment, domestic investment is very, very successful in that, you know, if you look at Central Huijin’s holding, if you own—you are the majority shareholder of, you know, say, for example, ICBC, the largest bank in the world, so basically you are guaranteed to have a pretty handsome return.

So domestically speaking, CIC—Central Huijin did not really have a huge problem. And then when you look at the international portfolio, which is separately recorded on CIC’s annual report, and what I did in the book is that I benchmarked the CIC’s investment against S&P 500 as well as other international peers trying to figure out how it performed and you will find a very interesting chart in the book.

Basically, you—it’s not difficult to recognize actually across the CIC’s past fifteen years or so its performance very rarely surpassed S&P 500 as a passive investment. And when you compare CIC’s investment return versus the rest of these peers, it is at most mediocre in terms of the—you know, the average returns of the rest of the peers and all that.

For SAFE, because of the nature of the—the relatively opaque nature of the state’s portfolio and some of its own—some of its investment—the investment company were not even reported on SAFE’s annual report it’s really hard to say.

But I would argue that a lot of this SAFE investment company—SAFE-affiliated investment company perhaps economic return is not necessarily the best way to measure them. For example, Silk Road Fund is—perhaps is a good example because they make—go out of their way to emphasize, the purpose of the Silk Road Fund, you know, of which they’ve owned 65 percent capitalized—when the Silk Road Fund was capitalized SAFE physically injected 6.5 billion foreign exchange reserves directly into the Silk Road Fund and, you know, it’s hard to really take a short-term—

O’NEIL: Give us a little sense of what the Silk Road Fund invests in just for those who don’t know it.

LIU: So the Silk Road Fund, for example, invests in major BRI-related project(s). That’s the basic fundamental of what a Silk Road Fund is asked to do and when—from highways to a port project, you name it, and including overseas energy infrastructures as well, like, from regasification facilities to port(s).

O’NEIL: OK. So mediocre returns for the CIC if you’re going to, you know, benchmark it to the S&P. How about the geopolitics? What—if you were going to—the scorecard on these funds and how they influence geopolitics was it a win or how would you frame it?

LIU: I would say up until recently it would—it’s actually a win in the sense—I remember having this conversation when I was doing field research and having this conversation with the—with a former CIC person and this person is particularly interesting because he also worked at—worked at the Central Huijin before. Central Huijin was being—was taken under CIC.

So his story is really—he really emphasized the people-to-people connection aspect of it, you know, the idea that a central—you know, when CIC invests it does not only buy shares in the companies or equity shares in the companies that it’s investing in. There is also the human connection there, the idea that you can—CIC being a very new fund when it was established there was barely a dozen people managing $200 billion.

So, you know, there was a huge drive in terms of how to reduce the (cash drag ?) and make investment as fast as possible. So being able to position themselves in the same room as the leading financiers in the world gives them a lot of credibility, in many ways. And then, you know, if you look at it in the long-term trajectory I would even argue CIC’s geopolitical influence is quite remarkable.

For example, during the Trump administration, you know, around 2007 this was the time, you know, he visited China and all that. So coming out of the, you know, that trip despite the U.S.-China relationship starting from the, you know, trade wars and all that fairly good—a fairly successful example would be CIC and that Goldman Sachs was able to create this China-U.S. Industrial Cooperation Fund and the fund was able—the Cooperation Fund was able to invest in a California rubber technology company and another supply chain monitoring technology firm.

And when CIC’s investment in the California company Boyd Group (sic; Corp) ran into trouble with CFIUS, actually Goldman Sachs was able to successfully argue in front of CFIUS and say, hey, you know what, this is—actually we manage the money. CIC has nothing to, you know, say or influence our investment. And, yet, if you look at the statement of the fund the fund actually said CIC, to a certain extent, does not directly participate in the fund management but they somehow can advise and provide investment advice.

O’NEIL: So let me ask you—I’m going to ask a little bit about responses and then I’m going to open it up to questions. So everybody be ready with questions.

But let me ask you about how other countries have responded to these investments and, you know, one is the sort of U.S. and Europe—that’s one set—and then the other would be, you know, many emerging markets or the Global South. And so let’s start—let’s actually start with the Global South. Let’s talk about emerging markets.

Obviously, you know, China has poured through Belt and Road, through the Silk Road, and others has poured billions, tens of billions, hundreds of billions of dollars into infrastructure and the like. Sometimes they’re often welcomed with open arms, though we’ve seen a couple cases where, you know, some of the opaque terms or onerous terms have been less than popular with new governments and the like.

So talk a little bit about how important these sovereign funds have been for that geopolitical influence in the Global South. Do you see a direct connection? Is this what’s important or are there other factors that are important, and how do you—is there a backlash against some of these funds?

LIU: That’s excellent point, Shannon, and I would want to—I would take a step back by emphasizing that, yes, you know, there are successful examples where CIC was able to push through investment hurdles, and despite CIC’s portfolio or, for that matter, most of the SAFE’s portfolio before, you know, the establishment of the Silk Road Fund or the China-Latin America Industrial Cooperation Fund and, you know, before the era of BRI a lot of this investment of emphasis really has been not necessarily in Global South but in Europe and America, and there was this short period of uptake.

I remember around—between 2014 and—between 2014 and 2017 for this period of time China’s investment in Europe experienced a huge uptick and some of the numbers that I studied it was shown—I remember in particular Germany, in the sense that around 2009, around the time of the global financial crisis, you know, when CIC made a huge investment in the U.S. market Chinese investment in Germany was—before that, 2009, was barely—like, non-investment. But during 2014-2017, if you look—just look at, you know, the transaction record, more than half of Chinese investment in Germany has been conducted by government-owned investment vehicles.

So from that perspective, you know, that basically said—says a lot about our allies and partners across the Atlantic in the sense that they have been having this glorious moment of receiving Chinese money with open arms. But that does not necessarily mean that, you know, they have been staying—you know, just doing nothing.

Actually, it triggered investment screening from Europe and—starting from Germany and then the entire European Union. So from that perspective, that’s another message I wanted to emphasize. Sovereign wealth—sovereign wealth fund or sovereign leveraged fund, as well as their global investment, they really do not represent uncompromised strength coming from—the investment screening triggered, you know, enhanced scrutiny. And then also, you know, with Russia’s invasion of Ukraine and, you know, United States’ and our allies’ and partners’ collective sanctions against Russia—seizing their foreign exchange—foreign asset(s)—basically exposed the vulnerabilities of having huge exposure to the—perhaps different regime type countries.

O’NEIL: I’m going to ask you one last question before I open it up to questions from the members.

And so there’s a really interesting example you say where the Trump administration actually let the CIC come in and invest in, I think you—a rubber technology company. Do you see a change in just these last five years in sort of that access today? If the CIC was coming to invest in a technology in California do you think the answer might be different either because it’s a different administration or because the world and U.S.-China relations have changed so much since, you say, 2018-2019?

LIU: Right. This is why I really love the Council because here, you know, we ask critical questions that are not just above my pay grade but also sort of trying to figure out, you know, where this is going, and this aspect of my job I really love.

And I would say because of the backlash against China’s strategically-oriented investment, CIC, as well as other Chinese government-owned investment institutions, experienced the institutional changes. Take the CIC, for example. Its overseas direct equity investment subsidiary, because of enhanced investment screening they had to dissolve it and now that—it used to be three—CIC had three subsidiaries. Now one of the subsidiaries in charge of overseas direct investment is gone.

So from that perspective, especially with regard to, you know, what is China really looking—what China or the strategic capital really looking forward to investing in sectors are actually off the limit, from our perspective. So from that perspective, I think unless there are some really, really innovative legal procedure—you know, we have lawyers up for hire—unless there are some really innovative procedures making/presenting a case argue against the enhanced screening against the CIC’s strategic investments, I do not think that is going to happen in the sense that, you know, perhaps investing in some agricultural health care—perhaps that is still on the table—but for supply chains from artificial intelligence, quantum computing, and things that China really—the Communist Party is really interested in, I do not think we are in that era for open investment.

O’NEIL: Thanks. Great.

Well, I am going to open it up, invite you all for your questions. Please remember this is on the record, and I’m going to start here in New York. I’m going to start with you, Tara. And there should be a microphone coming around.

Q: Thank you so much. Tara Hariharan from NWI. Congratulations, Zoe, on this groundbreaking work.

I have a forward-looking question regarding the priorities of these sovereign leveraged funds that you are talking about. It does seem, at least from the Western perspective, that even if Belt and Road was still a priority for China that they are decreasing their investments, particularly in certain parts of the world.

At the same time, clearly right now China is facing a slowdown in growth, and you mentioned them drawing inwards, and you talked about national security priorities. But in terms of actually supporting growth on the ground, do you see these sovereign funds—these sovereign wealth funds, so to speak, being able to do anything substantial in terms of growth stimulus within China? Do you think that might be the next step that China takes to support their economy? Thank you.

LIU: Thank you very much, Tara, for your excellent question. You always ask tough questions—(laughs)—and before I answer your question I want to congratulate you, as well. Congratulations on becoming a life member! (Laughter.) Yes, and we are looking forward to seeing you more often at our events.

So this is an excellent question, and I see where you come from. You know, you are a macro strategist and, you know, you and I have a lot of in common in terms of, you know, our approach analyzing the Chinese macroeconomic situation, all that.

And I—in terms of priorities, I do notice that since President Xi Jinping come to power, he has actually been not just personally taking an interest in using China’s sovereign leveraged fund to advance China’s national interests in global market. For example, you know, the U.S.-China Industrial Cooperation Fund, the so-called fund, all these international—the Industrial Cooperation Fund—even with France after his visit with Macron, and all that.

He has been trying to use this model, applying the sovereign leveraged fund model, leveraging data on asset, leveraging that into mobilizing the domestic resources, and more specifically, to finance strategic industries. And you witness this in the—in his whole initiative trying to transform how SASAC data—I just have to, like, S-A-S-A-C—state administration of—state administration—SASAC is the institution that manages all the state-owned enterprises.

So after coming to power in 2013, in one of those very important early meetings, he basically set his agenda, saying that right now we want SASAC to not just manage the personnels as well as the SOEs. We want SASAC to start managing capital. So basically that is his signature, saying that we want state-owned enterprises to figure out how to improve the efficiency of the capital being used in advancing strategic sectors, whether it is quantum computing or artificial intelligence. And the person he put in charge in implementing this transformation, laying out of the detail, was Lou Jiwei. Yes, he was a former finance minister, but he was also the leading architecture of China Investment Corporation. So basically the whole idea is trying to mobilize Chinese government-owned capital to not just invest overseas, but also funnel as much capital as possible into the areas where he—the party considers as important.

And this brings us back to stimulate the economy. So far we really do not—we haven’t seen—apart from, you know, the PBOC’s recently layered, lower-down headline interest rate, there has not been any discussions about fiscal stimulus. And that, I think—the government has all the reasons to not do massive stimulus. Part of the reason is because of the—the credit intensity is already too high, (basic idea ?).

You really need a lot more stimulus to generate a tiny little growth. And we also see Premier Li Qiang yesterday at the Summer Davos in Tianjin trying hard to inject confidence into the Chinese economy, the idea that, you know what? We can mention 5 percent growth despite S&P and others have downgraded their economic outlook for China. So from that perspective, I really do not think there is space for massive stimulus.

But that does not prevent the government to channel money into strategic sectors, because part of the reason is that R&D really is capital-intensive. And part of that also because China—because of investments waning, because of export controls, China no longer have the benefit of relatively cheap access to advanced tech.

And then, finally, local government(s) are really, really struggling to finance their own massive expenditures. So the room for massive stimulus is not there.

O’NEIL: We’ll take one right up here.

Q: Thank you. Scott Carlson, Calyx Management.

How does the governance, the investment committee, et cetera, for the Chinese sovereign funds compare to other sovereign funds you’ve looked at and/or private investment funds?

LIU: Thank you, Scott, for the excellent question in terms of governance. CIC is the only Chinese sovereign fund that is a voluntary member of the international sovereign funds forum and institute started by the IMF. So from that perspective, CIC presented itself from the global market perspective as—just as other major investors—institutional investors from private perspective as well.

They have their—they have established their own risk management team, and they have also recruited renowned scholars and financiers to be their external international advisory board. And finally, they also have their own investment steering committee. The idea is to provide overarching agenda-setting, if you will, and if you look at who are the people staffing CIC’s investment senior management, many of them are not just—yes, they are—many of them are from, like, Ministry of Finance veterans. Many of them, like, for example, like, people like (Guo Xiangjun ?), very well-renowned financiers that have tremendous amount of Wall Street experience.

So from that perspective, I would argue that CIC—if you just evaluate it institutional-wide, it actually looks very robust, the same way as, you know, Norway; the same way as Abu Dhabi Investment Authority; or, for that matter, Mubadala; or Kuwaiti Investment Authority as well; or, for that matter, Temasek. And actually, Temasek is a role model for a lot of China’s sovereign funds.

O’NEIL: And the reality? That’s what it looks like?

LIU: Right. (Laughter.)

You know, this is the part where, you know, if you ask, you know—if you ask the researcher Zoe versus Zoe as a person, I guess my answer would be different, you know, like, you know, when I—when I have a conversation with (Guo Xiangjun ?), he is actually some guy—really, really charismatic. The guy likes snowboarding and skiing. (Laughter.) And so, you know—like, you know, like—and this is a part of where I am personally really invested in a good China relationship with the rest of world, because, you know, my advisor taught me—like Professor Kent Calder in particular taught me that, you know, hey, you know, Zoe, state and countries do not shake hand with each other; it’s people. And I think this applies to the investment world as well.

You know, when I talk with the CIC people, interview them, they actually talk very fondly about their connections with perhaps a lot of you, and other financial expertise and financial talent that perhaps they could not have got if they never had the relationship with BlackRock, or for that matter if they’ve never invested in Blackstone, or J.C. Flowers, or, you know, the other—not—(inaudible)—invest companies.

O’NEIL: Right. Excellent.

Go right back there.

Q: Tao Tan, Perception Capital. Zoe, I share my colleague Tara’s congratulations on your book.

My question is this. China is undergoing demographic pressure right now. It’s aging very rapidly. At the same time, it has a fairly rudimentary social safety net and welfare state systems.

And my question is, as this sort of confluence of circumstances exacerbates itself in the decades ahead, do you see pressures on the sovereign wealth funds in China to address some of these social safety net concerns in addition to—as opposed to, you know—to the current political priorities that are being placed upon it?

LIU: Tao Tan, thank you very much for your excellent question. And you know, the demographic aspect of it is really something worrying to me as well.

You know, if I can put your question in the bigger context of U.S.-China relations, as well, I afraid that demographic is not on China’s side because—I think Professor Cynthia Roberts is nodding—(laughs)—you know, the idea is that, you know, I read a lot of—these days I read a lot of statistics because I grew up as a one-child generation, and many of the—right? (Laughter.) So many of my generation had to take care of the—I’m lucky that my parents, they are covered by the better—by the more generous aspect of the China social security system, whereas the majority of the Chinese people are not covered.

And guess what? According to WHO—you know, World Health Organization’s projection, by 2040 China is going to have more—like more than 400 million Chinese people aged above sixty years old. And that is going to—that basically means in two decades there is going to be more old Chinese people than the entire U.S. population. So that’s why, you know, I’m concerned in the sense that, yes, we are talking a lot about a great power competition, but Chinese leaders recognize demographics is not on their side. Therefore, I mean, what do they really—President Xi Jinping and all Communist Party leaders, they are facing this—I’m not exactly sure if they recognize this. Perhaps they do because, you know, really there are a lot of talented technocrat in China influencing—trying to give policy input there.

The whole idea is that, on the one hand, President Xi Jinping is emphasizing technology self-sufficiency and/or self-reliance, and on the other hand, you are facing a lot of these very daunting challenges to how to finance your elderly. As early as 2019—not that early, but fairly recently study by China—the Chinese Academy of Social Sciences, they estimated that by—at the current trajectory, by 2035, China’s social security fund—you know, is the strategic reserve established to finance China’s—to finance China transitioning to an aging population of aging society—by 2035 it’s going to run out of money. And guess what? Beyond right now, haven’t figured out how to finance the rest of the pay-as-you-go system. So from that perspective, they are—on the one hand they are trying to, you know, tell the firms, in order to alleviate the firms burden to pay into social security, you know, let’s lower your contribution. Oh, that basically means less money to finance the elderly.

So if you ask—if the question is, is there some logic for President Xi Jinping to prioritize technological advancement and all that? Perhaps there is. The hope is that, with technological advancement, you can perhaps make up or even offset your, on the one hand, labor productivity issue, and on the other hand, labor shortage.

The labor productivity issue right now is a severe challenge because I grew up in an era where you just have to study hard and work hard. But, you know, the Gen Z people—somehow it’s different in a sense that many of them either quit very lucrative corporate jobs, and on the other hand, many of them are just reluctant—the so-called tang ping, “laying flat,” and they just do not want to participate in this meaningless competition.

So, again, demographics is not on China’s side, and I’m—I simply haven’t figured out a way how they are going to finance—(laughs)—the upcoming demographic challenge.

O’NEIL: Good.


Q: Thank you so much. Constance Hunter from Corebridge Financial. Congratulations on your book. I’m looking forward to reading it.

I want to follow up a little bit on what Shannon was asking earlier regarding the Global South, in particular Belt and Road sort of financing for Africa and the Middle East. A lot of those countries are experiencing financial difficulty. Repayment is not happening. There is a reluctance to go to the Paris Club and join the Paris Club to recapture debt to restructure debt.

So in the absence of that, what type of restructuring activities are being contemplated? And what types of write-offs are needing to be taken?

LIU: Right. Thank you very much, Constance, for this excellent question.

I actually tried—you know, one of my conversations earlier this year with some Chinese finance people, I asked them exactly the same question, like, you know, the—what are you going to choose to sacrifice? Are you going to basically take a haircut, you know, like—but you harvest goodwill, or what are you going to get? (Laughs.)

Unfortunately, the answer that I got, at least from them, is that, well, you know, first of all—this is from, you know, I quote—paraphrase the conversation that I heard. You know, first of all, you know, remember China is a contributing member to IMF and World Bank, and the whole idea is that whenever World Bank is going around and doing debt forgiveness, China is suffering, too.

So in that—in this context, basically, if we are also—not just through world and multilateral, but also our bilateral lending, we have to—we have to take another haircut. That is a lot of debt suffering for us. So if you invest—if that—it’s basically non-performing loans, but now this is not just on Chinese domestic and non-performing loans on the SOEs but, you know, it’s on the Chinese investment overseas.

And then the second aspect of that is a lot of this investment—a lot of these debt difficulties is—it’s not the Western economies or Western lenders are the largest lender, it’s the Chinese entities, like, for example, China Import and Export Bank, in particular, is the largest investor or financier for many African economies.

So from that perspective, is it fair? They asked me a fairness question in response to my question. Is it fair for the largest loaner to be treated the same as the minority loaners? So, you know, in that perspective, I really do not—do not quite—I really do not have a good solution for that matter.

However, I do think having—for example, Japan is very much eager to be a—play a mediating role to try and to socialize China with the Paris Club lending practices, and it just seems that they can be making pretty good progress, especially in the context of Zambia. And on the other hand, China have already learned from the international (image of ?) catastrophe with regard to Hambantota and all that, and people even make the joke. They’re saying that, why you even—why you would even sign a contract for ninety-nine years? Is it because of, like, Hong Kong and other things like in ninety-nine years, you know? So from that perspective, you know, China has learned also the bad international image problem.

So I do think, at least at the working—at the working agency level, people—you know, you talk with the—(inaudible)—people, you talk with people like Adinti (ph) and all that. They genuinely believe that there needed to be a more decent solution of trying to figure out a way that China can suffer less financial damage while maintain its international image. But the reality is, you know, because of a lot of these debt-trap narratives, if you ask many people from African economies, it’s not that—it’s not necessary that they themselves had a debt trap; it’s more about they heard of this and they experience, oh, yes, now that I realize I cannot pay off the Chinese loan, they started to become suspicious.

It used to be the case that, well, China at least had been successful in projecting itself as, you know, we are the only lender in town; there is no other—there is no other, you know, banker helping you finance the project. But at least in the—(inaudible)—right now, you know, the United States, we stepped up. We have our Development Finance Corporation and we are entering into partnership with other financial institutions like Japan Bank for International Cooperation. So from this perspective, I think having Japan as a—playing a mediating role, trying to socialize China with the rules in terms of debt restructuring, is probably a big—you know, helping China moving towards the right direction. The idea is, you know, China really wanted other countries to help China help itself.

O’NEIL: Great.

Question right there.

Q: I’m Tim Ferguson. I’m a business journalist.

There is an uproar in parts of the U.S. over Chinese purchases of American farmland. Have the sovereign funds been involved in that?

LIU: That’s an excellent question. I did some studies on the farmland thing from the perspective of China’s diminishing farmland and, you know, for the whole local government financing perspective of it, and when I look into the numbers, it looks—it turned out that China’s—of all the foreign ownership of U.S. farmland, Chinese ownership is less than 1 percent. And not Chinese sovereign wealth fund are involved. And on top of that, you know, if you—if we are curious of who owns most of our farmlands—

O’NEIL: Yeah, who else? (Laughter.)

 LIU: It’s actually the Canadians. So from that perspective, our good—(laughter)—good neighbor—(inaudible). (Laughs.)

O’NEIL: Great.

Question in the back there, please.

Q: Hi. Isaac Stone Fish from Strategy Risks.

So China and Taiwan—book looks fascinating, by the way; looking forward to reading it. China and Taiwan—China and the U.S. may go to war over Taiwan. If the U.S. and China are fighting a war, how do you see a lot of the Chinese financial institutions, especially the ones that are literal arms of the party state, supporting the Chinese war effort? Thanks.

LIU: Thank you very much, Isaac, for a kind word, and last year I wrote a(n) article talking, explaining what President Xi Jinping has been doing in preparation—you know, basically, you know that—I never get to choose the article title, but the title is how President Xi Jinping needs to prepare for a war economically. (Laughs.) So I would encourage you to go to that article and check it out.

But basically, I would—I would take a step back explaining why I think perhaps President Xi Jinping, yes, he is trying to isolate a bunch of the Chinese economy, isolate the Chinese economy as much as possible so that the sanctions against China is at least going to be equally more damaging to the sanctioners. He has been doing—systematically doing that, and I wrote that in those articles.

But then, you know, I want to take a step back by saying that, you know, if you look at the PLA combat forces, 80 percent of the PLA combat forces right now they are the one-child generation. They grew up in my era. And that imposes a serious social mobilization problem which is, on the one hand, you want to convince all these millions of families that it is a good idea to send your only son and your only daughter to war.

And then the other part of it is—goes back to Tao Tan’s question, which is, well, you have a looming demographic crisis, and guess what? The government is seriously encouraging every Chinese family to have not just the one child, but three children. It’s a three-children—if your son or your daughter is—they are the future of the Chinese generation, right? They are the future moms and dad.

So how are you going to solve this kind of seemingly competing priorities? So that’s the—you know, on the premise with regard to going to war against Taiwan.

And in terms of—if that ever happened and, you know, understanding our premise there; you know, there is a serious social mobilization problem that have undermined China’s economic growth. And if that were to happen, President Xi Jinping would seriously prepare the Chinese economy in a sense that, all right, I’m not the person who proposed this but, you know, you read the—you read the stories in the papers talking by renowned Chinese strategists; for example, Jin Canrong or Yu Yongding. Those people were even seriously questioning the efficacy for China to diversify its foreign exchange reserves in Western market. The whole idea is, well, you look at Russia and you look at, you know, how the West can basically froze Russian foreign assets; the whole idea of China diversifying its foreign exchange asset in foreign market is a terrible idea suddenly.

It used to be the case that, you know, Investment 101: Diversification. Now diversification is no good anymore because the more you diversify, the more vulnerable you are in times of tensions. So that’s why I think, you know, again, serious social mobilization problem, right? (Laughs.)

But if that were to happen, President Xi Jinping will have to prepare the Chinese economy resiliently enough to endure sanctions, or at least making sanctions equally or even more painful for the sanctioners. And we—perhaps, you know, the COVID isolation or the zero-COVID policies that border isolation, all that, was a good, natural experiment in a way, and that China learned perhaps that it cannot—its economy really cannot endure severe isolation. And I hope that he learned the lesson.

O’NEIL: Let me ask one more question that kind of builds on what you just said and some of the other questions that have been here. And the—like, maybe it’s a provocative question; maybe it’s not, but the premise of the question is, is the age of China sovereign funds over? And the reason—let me pause and put a few things out there. One is, you know, they—as I understand from reading your book, as I understand it, it’s that they just had trillions of dollars pouring in because of export, you know, trade, and surpluses, and the like. And they didn’t want to put it all in Treasury, so they created these funds.

They had all this money—or they had two to three trillion dollars floating around, so they wanted to put it in something besides reserve. So the money was flowing in.

Today not as much money is flowing in, right? The economy is slowing. We’re seeing trade as a percentage of GDP in China pull back; it’s not as important as it was. And maybe that direction will continue. So that’s one side. There’s not as much money floating around.

Second is, you know, the Xi government—at least from my reading; I would defer to you—is, you know, politics is much more at the forefront than economics. And when you, as I read your origin stories, part of the reason was to at least put a nice, market-friendly face on government intervention, right? These are market institutions, right? The governance structures look like international governance structures, so that’s all good.

But I don’t see Xi caring quite as much about that as perhaps presidents did, sort of having this market front, or veneer—or reality, as the case may be. So there do we care so much?

And then the last is the point you just made, which I think is really interesting—is, you know, the Russia story is a really worrying one for China where, you know, all this money that you’ve sent abroad—you know, we froze Russia’s assets that are out there. What if we froze—what if the international community froze two to three trillion dollars at a time when debt to GDP is rising in China and all those sorts of things.

So is, you know, the story—it’s a great story, and there are still these big funds out there, but is perhaps this age of sovereign funds as a big part of China’s global ambitions, is it—is it diminishing?

LIU: That’s a(n) excellent question. Shannon. And I’m afraid to say that perhaps the glorious days where Europe or American institutions fully embrace government owning—(inaudible)—institutions or state capital. Perhaps we are no longer in that—in that age. That boat has already sailed.

However, we do see a lot of the transformations of China’s sovereign funds in a sense that, under Tu Wangxiao’s (ph) leadership in particular, Chinese sovereign funds started to recognize the global backlash against strategic investment. Hence, they started to partner with premier investment institutions in hosting countries, setting up joint investment funds with the idea that, you know, CIC is not necessarily taking the—(inaudible)—and China’s other strategic investment funds are not necessarily taking the driver’s seat. They are more trying to learn how to structure the deal so that the strategic capital aspect of the investment is buried deeper and deeper. And this present a more serious challenge to our own investments (bringing ?) in the sense that we have a lot of brilliant mergers and acquisition lawyers here in this country, and we have deep expertise helping you set up joint ventures so that it’s less obvious that this money comes from Chinese state-owned investment funds. And for that—for a long period of time, you know, here in the great state of New York, we tend to not to ask too much questions about who are the shareholder on this thing again? (Laughter.)

So from that perspective, I think, you know, the sovereign funds, they are learning. And, you know, yes, the age of fully embrace—fully embrace their investment perhaps is not there. But, you know, they are learning about how to play the new geoeconomic game in the shareholder capitalism because, after all, Western democratic economic or market-oriented economies are still very much about—is about shareholders. And our financial institutions, our firms care about the value of shareholders. So from that perspective, it’s really up to us to figure out how to up our game in many way, trying to set the boundary, what is off the limit, and how to detect the ultimate—basically follow the money. Who is ultimately the shareholder that is owning shares in our robotic companies, our chip companies?

O’NEIL: Great. Well, you all have heard the breadth of knowledge, and there’s a depth that’s also in this book. It is for sale right outside, and Zoe has promised she will sign it, so you get a twofer there.

But first I want to thank Zoe for that and thank you all for joining us. (Applause.)


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