SWFs are catalysts, harbingers of stable growth

(China Daily)
Updated: 2010-06-24 09:30
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Editor's note: Jin Liqun, chairman of the supervisory board of China Investment Corporation and deputy chairman of the International Forum of Sovereign Wealth Funds speaks to China Daily about efforts to improve understanding of the role the funds play in the global economy.

Q: Sovereign Wealth Funds (SWFs) have recently attracted a lot of attention from the general public, particularly in advanced economies. It seems that not many people know about this kind of funds. Could you please tell us more about SWFs?

A: Curiosity about something unknown or unheard of is quite normal. SWFs have been in existence for more than half a century and there has never been any issue about this particular kind of fund. I think that the recent attention given to SWFs is partly due to the increased visibility of these funds in the years running up to the financial crisis, and partly due to the financial protectionism, which tends to sound a false alarm about the impact of SWFs on recipient countries.

There is no denying the fact that SWFs have become important players in the globalized economy, both in terms of the size of this "family" and the financial assets under their management. However, I do not think that these funds are dominant players, and probably never will be, considering the huge amount of private capital moving around the globe every day.

Q: Then why are some people so worried about SWFs? Do you think that the word "sovereign" is a cause for concern?

A: There is certainly nothing horrible about the concept or reality of "sovereign". In this case, "sovereign" implies "state-owned". When it comes to state-owned enterprises (SOEs), the common reaction is that they are inefficient.

It is certainly wrong to categorically put SOEs in the basket of inefficient or loss-making businesses. I am pleasantly surprised to see that SWFs are free from the stigma of inefficiency. Indeed, the track record of SWFs indicates that these funds are contributing to the wealth accumulation of their respective sovereign governments, and are benefiting the recipient countries as well.

For all their "sovereign" trademark, SWFs operate independently and their objective is to achieve reasonable returns on their investment over the long term. There shouldn't be any concern about their operations.

Q: We know that SWFs have tried to clear up misconceptions about their identity by working out an agreement, called Generally Accepted Principles and Practices (GAPP) or the "Santiago Principles". What is the background to that?

A: Some people started to feel a bit uneasy when they saw increased investments made by SWFs in a number of countries, particularly in mergers and acquisitions, infrastructure, mining, etc.

The perception of their growing impact on mature economies feeds into worries about threats to national security, and control over their domestic economy.

It was surprising that the capital flows to those advanced countries have created such a political backlash. It was therefore necessary, and quite urgent for that matter, to handle this problem.

Q: Was there any official response from mature economies seen as targets of SWFs' investments? Has there been formal communication between them?

A: Yes. The mature economies were worried about the geopolitical motives of the SWFs as they expanded their business activities into a whole range of sectors, which seemed to resonate across the entire world. It goes without saying that the major advanced countries would like to bring them under a kind of control or restraint.

In October 2007, the communiqu issued by the G7 Summit demanded that the international community should work out standards governing the best practices of SWFs, such as corporate governance, risk management, transparency and accountability.

Indeed, it was the demand of the G7 which led to the decision to authorize the International Monetary Fund to work with SWFs to produce such principles.

Q: It seems that the G7 has a major role to play in this regard. What do you think are the major factors that have made it possible for SWFs to accept the G7's demand? And what exactly is the role which the IMF has played throughout this entire process?

A: Well, to a great extent, the Santiago Principles represent the needs of both SWFs and major economies. So far as the SWFs are concerned, the priority was to mitigate recipients' unease and build up their trust in their engagement in these countries. Obviously, things won't work if they are not welcome in the countries they invest in.

The 26 SWFs which formed the International Working Group of Sovereign Wealth Funds (IWG) in April 2008 to address the concerns of their counterparts in the developed world represent collectively around $2.3 trillion in financial assets under management.

It would serve them well if they could reach an agreement on a set of principles likely to convince the recipients that they meant no harm, and instead would actually contribute to the economies which happen to be home to the bulk of the SWFs' investments.

As for the major economies, they would like to see that these funds comply with the governance framework regulating their behavior. Having the IMF sponsor the organization of the IWG, and take charge of drafting the code of principles in cooperation with SWFs is probably the best way to mitigate their concerns.

The credibility of the final agreement would be enhanced by the involvement of the IMF. All of the 26 SWFs are owned by their governments which are members of IMF, and the major advanced countries have a key role to play. If they do not trust the IMF, who else would be qualified to play such a role?

It should be noted that the IMF provided secretarial services and intellectual resources and did not intend to impose any of its own ideology on the final product of the IWG.

The IWG rapidly held four rounds of meetings in Washington DC, Oslo, Singapore and Santiago, respectively, and concluded its negotiations within four months. There were definitely tough debates on a number of issues, but overall, the negotiations were conducted in a cordial atmosphere and in a constructive manner.

SWFs are catalysts, harbingers of stable growth

Jin Liqun, deputy chairman of the International Forum of Sovereign Wealth Funds. Edwin Tuyay / Bloomberg 

Both the SWFs and the representatives of recipient countries understand the high stakes they have in the agreement, and the unnecessary cost of prolonging this process.

Q: The Santiago Principles require that SWFs should observe the principles of transparency, disclosing information about their investments. Would they implement these principles, and how could they reconcile this requirement with commercial confidentiality?

A: GAPP, later increasingly referred to as the Santiago Principles, are to be implemented on a voluntary basis. Full implementation will take some time, as this is a complicated issue and some of these funds are not ready. But the progress has been very encouraging. The Santiago Principles cover a broad range of issues, such as corporate governance, risk management, transparency, and accountability.

The SWFs are obligated, at least morally, to contribute to global financial stability and promote cross-border capital flows and investments. They should observe the laws of the countries in which they invest and are subject to requirements related to disclosure of information.

There are usually investment screening or review authorities in the recipient countries. The SWFs are concerned over the possibility of leakage in the screening process, and the authorities in the recipient countries are committed to protecting the confidentiality of the information delivered. Information would be provided to the general public at an appropriate time.

Q: As deputy chairman of the International Forum of Sovereign Wealth Funds, or IFSWF, what is your role and what is the function of this forum?

A: In February, 2009, a conference attended by 14 SWFs was held in Paris to discuss the proposal to establish the International Forum of Sovereign Wealth Funds. There should be an organization to continue the efforts to implement the Santiago Principles and promote the exchange of views among SWFs, now that the IWG has wound up its functions, with its mission accomplished. Afterwards, the conference held in Kuwait reached an agreement in principle on the forum's nature, mandate, governance and funding.

It was agreed that the forum's chairman, and deputy chairman should be elected on a consensus basis for a two-year term. The annual meetings should be arranged by the chairman, the deputy chairman and the chairman of the previous term. At the outset, there was no chairman of the previous term for the first two years, and so two deputy chairmen were elected to maintain a tripartite system.

In the future, there will be chairman in the past tense, chairman in the present tense, and chairman in the future tense. We have had the inaugural meeting in Baku, Azerbaijan, and the second meeting in Sydney with the close cooperation of the chairman and deputy chairmen.

Q: Perceptions of SWFs have changed a bit in their favor during the financial crisis, given the resources they have provided to or maintained in the recipient countries which need them. Does this mean that the need for resources is more important in shifting sentiment than the Santiago Principles?

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A: The role of the Santiago Principles is undisputed. The recipient countries would not be willing to take resources from investors if their motives were questioned. The crisis helped to clarify the role of SWFs, but it was their commitment to implementing these principles that was the crucial factor in shifting the mood.

The financial crisis has given SWFs a chance to showcase their contribution, but they would be denied this chance if they are not viewed in a positive manner. I do not think that the SWFs' role should be exaggerated one way or another.

For all the resources under management, it is not that significant compared to the total capital flows across the world. It is hoped that crisis will not happen again, or at least they should be few and far between.