US on China's Investments: Trust, but verify

At a time of tremendous sensitivity where many of its activities are receiving global attention, China's investment actions are no exception. The China Investment Corporation (CIC) is China's firm, which manages its foreign exchange reserves. A sovereign wealth fund, the CIC was established in 2007 in response to enormous state losses, resulting from the rising Yuan and the plummeting Dollar. Despite losing nearly half the value of $3 billion in a Blackstone (a US private equity firm) stock invesment, the CIC is reportedly the fourth-largest SWF worldwide.

Foreign countries have typically been suspicious of China's foreign investment activities, speculating that its vast wealth could be used to buy majority stakes in companies with hands in western government and policy pots. Americans in particular fear that should China become an unchecked financier, it would become supremely positioned to influence multinational companies such that their policies could be swayed to protect Chinese interests.

To address skeptics in the international community, China has ramped up its PR efforts, with Gao Xiqing, CIC's President, opening up for interviews and to the media: “Some think we are from a Cold War era and Red China. We are still regarded very much by many countries as a potential threat.” Bristling at all the criticism, he says “Immediately after we announced our existence, then the US government, some European governments, all came out and said, ‘okay, we think of this as – this is a dangerous – we need to do something about it. They probably want to control us. They probably want to do something bad about us.’ ”

A huge factor fueling flames of mistrust is the American perception that China has no intention of improving the transparency of its foreign investments. China will claim that its investments are commerically-driven until it's blue in the face, but when its stock in US financial firms plundered, it held on. The US is simply uncomfortable with being in the dark. To China's credit, they really can't seem to catch a break. Every angle is a bad one, it doesn't matter if the mirror is straight or angled. In response to why China doesn't want to “touch the military,” Gao says: “Because we are already getting too much, almost unfair amount of attention. You know, the Chinese culture is being self-effacing, try to hide yourself, don't stick your head out for people to knock on.”

Speaking to the tranparency question, China refutes that as a relatively young SWF, the CIC has not yet had the opportunity to produce and communicate information, as that contained in annual reports. And in tune with China's commercially-driven investments mantra,  the “but” in China's pledge to become transparent is that the ceiling will be measured by what is considered to be “commerically-viable.” Can't really blame them there. What's the point of trying to make a good investment if everybody knows what's next, what you can afford, and what you’re looking to get rid of?

China has thus far employed a not unreasonable, middle-of-the-road path forward, shirking investments in sensitive industries and sectors (military factories, tobacco companies, machine gun companies, casinos); aggressively pursuing foreign financial sectors; promising more transparency; and displaying indignation at the notion of leveraging a financial nuclear option*. 

Gao describes the difficulty of navigating from a delicate position between a throng of historically proud Chinese natives (“. . . a lot of other Chinese people are telling us that , ‘Look, you know, you guys should be against it. You should stand up against.’ “) and a frowning foreign populous. Its stance? CIC has walked away from potential investments in unnamed countries after political red flags were waved; “We are trying to get financial returns. If there is too much political pressure and too much unpredictability, you just go away.” How's that for bottom line?

Another bottom line? The US cannot afford to be without China. Former US Treasury Secretary Lawrence Summers explains the counterproductivity of walking away from China's money: “It would mean that Americans would pay more for goods. It would mean that our interest rates would be higher.”

With a very American “trust but verify” approach, Summers emphasizes the need to encourage China's pledge for Norwegian gold-standard transparency. Encourage, but heed with wariness: “I think [China's investment strategy] is an issue our government does need to pay close attention to,” he adds.

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* Financial nuclear option describes a scenario where China would have a large enough stake in a foreign country's industries to threaten to pull its money, whereby the country hosting investments would either face an enormous financial collapse or be forced to steer its direction and policy to China's favor.