A tale of two sovereign funds: China's exceptionalism in sovereign wealth management through CIC and SAFE

Abstract

China is the only country in the world with two sovereign investment vehicles dedicated to managing excess foreign reserves for return, not just safety and liquidity. As the investment profile and behaviour of both funds align with the aims of the government's economic agenda, it is tempting to view China's two sovereign funds as part of a coordinated effort to further state investment policy. However, analysis of the origin of China's multi-sovereign investor regime shows that this approach is primarily a product of intense bureaucratic rivalry within the Chinese public service, rather than a considered strategy of the sponsoring government. This rivalry had a detrimental impact on aspects of the CIC's institutional design and early investment decision making. Comparison of the CIC, China's flagship sovereign investor, to its peer Asian funds in Korea and Singapore reveals that relative to regional reserve investment corporations, the CIC lacks robust mechanisms to achieve effective arms-length governance from its state sponsor. Reforms to the Chinese sovereign fund to ensure greater clarity of mission and alignment of purpose with internal decision making would ensure Chinese exceptionalism in sovereign investment transitions from cautionary to exemplary.