The Chinese are Buying, Should We be Selling?
中国政府在投资买入，美国仍要继续卖出么？

Chinese yuan is becoming increasingly important in the world economy. Photo courtesy of EETV.

"Unlike the SWFs of places like Norway that are highly transparent, the Chinese fall more on the side of Middle Eastern SWFs which do not offer transparency," Luft said. "It's hard to tell how their decisions are made and what their investment philosophy is, so everything is very speculative."

The supposed threat is that, through the financial markets, U.S. companies will lose their independence and necessarily serve the foreign policy interests of other countries. This fear builds on an assumption, as Luft puts it, "economic power often is translated into geopolitical power."

"China is purchasing an unprecedented amount of U.S. debt," Setser said. "Consequently, it's central to the process by which the U.S. government finances itself, central to the process through which the agencies raise money which they use to buy U.S. mortgages, and central to the overall financing of the U.S. external deficit."

The large sum available to the CIC coupled with the lack of transparency has caused some to raise red flags in a slowing U.S. economy.

Peter Navarro, professor of economics and political policy at University of California, Irvine, and author of The Coming China Wars: Where They Can Be Fought and How They Can Be Won, testified before the U.S.-China Economic and Security Review Commission that "China's SWF investments have contributed to the destruction of jobs and the slowing of economic growth in the U.S. because they are being accumulated and invested through the application of mercantilist trade practices that violate the norms of free trade."

According to Navarro, those violations include numerous World Trade Organization infringements, lax health and safety regulations, and currency manipulation.

"China manipulates currency," Navarro said. "The way they do that is they maintain a fixed peg with the dollar, and in order for them to maintain a fixed peg they have to recycle dollars back into the U.S."

Qualms over whether or not the Chinese government will use CIC investments for political ends are at the center of concerns about SWFs. At the same time China's investments in U.S. debt and corporations mean that China has a great stake in the overall health of the dollar and the U.S. economy. These investments in debt help keep U.S. inflation and interest rates low.

The CIC is also expected to permit diversification away from dollar denominated U.S. investements.  To try to ease worries in the U.S. and elsewhere, CIC officials have stated that the company will not invest in politically sensitive sectors such as overseas airlines, telecommunications, infrastructure or oil companies.

On April 6, CBS broadcast a 60 Minutes interview with CIC president Gao Xiqing. Gao was grinning and, affable,  telling correspondent Lesley Stahl that CIC will not intervene in the business decisions of the foreign companies they invest in, or obtain positions on their boards.

"It's our policy not to control anything," he said in that interview. "We don't want to go in and say, 'OK, I think you should change this person or I think you should change this product line. That's not our business."

Furthermore, the CIC, according to Gao, is taking stringent measures to become more transparent, something that has not been celebrated in Chinese culture.

"Our government has never been transparent for 5,000 years," Gao told the Financial Times. "Now we are told we need to be transparent and we are trying."

It remains unclear, though, exactly how CIC will make itself more transparent. The company is less than a year old and there is still American angst over the potential geopolitical power SWFs and their government masters might wield.

But one thing is clear—the U.S. and China are stuck with each other.

"Both economies are critical to each other," Luft said. "There is a strong interdependence—the Chinese need the U.S. market and the U.S. needs China's foreign exchange and investment. It's almost like two twins that depend on each other for survival."

Despite this acknowledged interdependence, or perhaps in light of it, there are calls for guidelines. There are already regulatory limits in the U.S. on foreign investment and ownership of certain industries, and major, potentially influential activity is subject to approval by federal regulators.

The calls resound internationally as well. Clay Lowery, U.S. Assistant Treasury's Secretary for International Affairs, called on the IMF and the World Bank to develop a set of guidelines for SWFs, and Congress adopted legislation in 2007 to help monitor and regulate foreign investment in the United States.

But according to Navarro, "regulation of SWFs through the IMF is not going to happen" because "it's not a practical solution to anything."

Navarro and others argue the many facets of the global financial marketplace require a more extensive framework to assess foreign investment in the U.S. and, in particular, to improve the transparency of SWFs like China's.

"Given how arbitrary the line is between central bank reserves and sovereign funds, how money can be moved from a sovereign fund to a state company, and how money from a central bank can be placed in a state banking system and lent to a state company, I think the review process has to be broader than one that just covers sovereign funds," Setser said.

Worries that China is trying to gain geopolitical advantage through foreign investment may be overblown. China's purchasing of foreign assets—on the surface at least—is part of the country's economic policy to diversify the government's investment portfolio and invest its resources more aggressively in order to improve earnings. It could be, as CIC preparatory group member Jesse Wang told the European Wall Street Journal, "purely investment-return driven."

"I think that in most voluntary transactions the buyer, or in this case the investor, and the seller, in this case the American company, both gain from the transaction or they wouldn't engage in it," said Charles Wolf, chairman in international economics and senior economic adviser for the Rand Corporation. "I think that is generally the case for Chinese investments in Blackstone, in Merrill [Lynch], and in CitiGroup."

Wolf continues, "I think it's important that these transactions be transparent, but with those two caveats-the one about defense related firms and the one about transparency—I think Chinese investments, Chinese acquisitions of shares in American companies are good for both them and us."

This is why many observers remain optimistic that the SWFs will yield positive results for the countries they serve and the foreign firms they invest in.

"By the end of the day what happens with SWFs is they invest through things like hedge funds and other mechanisms that are in themselves very transparent," Luft explained. "So there are multiple layers of regulation that needs take place, and the challenge is how to do it in a way that does not scare away foreign investors, because after all we would like to welcome investors, we just want to make sure it is done in a way that it is not detrimental to our economic sovereignty."

It is too soon to know the impact of China's SWFs. There is a clearly increasing trend toward interdependence, which is even more evident in SWF investments. Even those who anticipate positive outcomes, however, recognize the need for greater transparency on the part of the SWFs and attentiveness on the part of regulators.


Lucas Rubio is currently an undergraduate studying journalism at Santa Monica College.