China’s SWFs: Next Targets of Calls for Greater Transparency?

On March 5, China announced that it was increasing its defense budget for 2014 by 12.2 percent over the 2013 level, to $131 billion. Analysts and diplomats greeted the news with complaints that Beijing’s disclosures about its military spending are unduly opaque and often low-ball the actual defense budget by not including many weapons programs. Japan’s Chief Cabinet Secretary, Yoshihide Suga, captured the prevailing sentiment when he commented later that day, “The lack of transparency in China’s defense policy and military capacity has been a matter of concern for our nation and the international community.”

Two days later, another announcement about another aspect of China’s growing prowess garnered far less attention, even though it concerned Beijing’s control of assets 10 times greater than the PRC’s annual defense budget.

On March 7, the Sovereign Wealth Fund Institute (SWFI), a private organization that monitors government-funded investment vehicles, released its assessment of 51 sovereign wealth funds’ transparency for the fourth quarter of 2013. The 51 funds examined included four Chinese funds that together have approximately $1.3 trillion in assets.

The SWFI appraises a fund’s openness by means of the Linaburg-Maduell Transparency Index. Developed by Carl Linaburg and Michael Maduell in 2008, the index awards a fund one point for its adherence to each of 10 principles of open management, such as provision of up-to-date and independently audited annual reports, disclosing its ownership percentage of company holdings and the geographic locations of holdings, and clearly outlining its strategies and objectives. The minimum rating a fund can earn is a one, and a score of eight or higher is deemed necessary for a fund to say that it is adequately transparent.

The China Investment Corporation, Beijing’s largest SWF, with $575 billion in assets, scored a seven. China’s National Social Security Fund, with $160.6 billion in assets, earned a five. The two other Chinese SWFs on the list, the SAFE Investment Company, with an estimated $567 billion, and the China-Africa Development Fund, with $5 billion, each received a score of four on the LMTI. (The Hong Kong Monetary Authority Investment Portfolio, a $326 billion fund under the control of the Hong Kong Financial Secretary, received a score of eight on the latest LMTI.)

By contrast, 10 of the other SWFs on the list – including Singapore’s pioneering Temasek fund – received scores of 10. One of the five state-based American funds on the list was among those “perfect 10s,” while the other four American funds each had a score of nine.

The Chinese funds’ low scores on the LMTI are not surprising given Beijing’s proclivity for controlling the flow of information, as manifested in everything from its curbs on the media and Internet to the international community’s aforementioned criticisms about the accuracy of PRC statements on defense spending. But as Chinese SWFs and companies do more and more investing abroad, they can expect other countries’ citizens, media, and governments to look for greater openness. This already has been seen in some of the backlash against Chinese companies’ activities in Africa in recent years, as well as in Shuanghui International’s acquisition last fall of American pork processor Smithfield Foods.

Of course, Beijing has made recent moves toward greater economic openness and integration, as evidenced by Saturday night’s announcement by the People’s Bank of China (PBOC) that it would expand the trading band for the yuan from one percent to two percent of the central bank’s benchmark exchange rate with the U.S. dollar. In the past, however, such moves often have seemed to belong more to a series of fits and starts, or to be responses to specific circumstances, than components of a comprehensive long-term plan. The PBOC said Saturday that the widened trading band was instituted to make the yuan more responsive to market forces, and that it would refrain from routine intervention in the FX market. While those steps serve the long-term goals of increased market openness and preparing Chinese companies to deal with currency fluctuations, the central bank clearly also had a near-term goal of dissuading currency traders from expecting that an appreciating yuan represented a one-way bet.

What remains a safe bet is that as China’s ascent continues, international calls for increased transparency will rise along a parallel trajectory. What remains anyone’s bet is how China will respond to those calls.