Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions
“Liu, an expert on international political economy at the Council on Foreign Relations, shows how the Chinese Communist Party (CCP) uses ‘sovereign leverage funds’ to promote fiscal security at home and geopolitical influence abroad.”
In assessing the challenge posed by a rising China, many Western observers focus on the growth of China’s military power, its aggressive moves in the western Pacific, and its strategic alignment with a newly assertive Russia. Another important aspect of that challenge, however, is China’s financial statecraft, which is the subject of Zongyuan Zoe Liu’s book Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions.
Liu, an expert on international political economy at the Council on Foreign Relations, shows how the Chinese Communist Party (CCP) uses “sovereign leverage funds” to promote fiscal security at home and geopolitical influence abroad. She accomplishes this by, in her words, “following the money.”
The genesis of the CCP’s use of sovereign leverage funds (SLFs) was the 1997 financial crisis in Asia, which a few years later resulted in the creation of Central Huijin to recapitalize the state-owned Chinese banks. Liu describes Central Huijin as yangqi—“an enterprise wholly owned by the Chinese state.” It was used to restructure China’s banking sector and later Chinese securities brokerage firms. It was provided with $66.4 billion in foreign exchange reserves for these purposes. Its senior management is appointed by the CCP’s Organizational Department. It does the Party’s bidding.
Another key sovereign fund Liu discusses is the China Investment Corporation (CIC), which was created in 2007, quickly acquired Central Huijin, and branched out into subsidiaries CIC International in 2011 and CIC Capital in 2015. Through these vehicles, the CCP has “mobilized capital to support projects and companies that advance the strategic interests of the Party-State” and financed major Chinese tech companies like Alibaba and Didi Chuxing. CIC invested in global markets, including in American companies such as Blackstone and Morgan Stanley, which raised national security concerns in Washington.
Liu highlights CIC’s investment activities in oil and natural gas companies, mining and metal companies, and power producers, energy traders and utilities—investments that are aligned with the interests and priorities of the Party-State. CIC has been a major supporter of China’s Belt and Road Initiative (BRI), which Liu accurately describes as a geoeconomic program to expand China’s influence across Eurasia, in Africa, and Latin America. Through CIC, China has acquired ownership interests in Turkey’s Kumport Terminal, Greece’s Piraeus Terminal, and the Australian ports at Melbourne and Darwin, as well as the so-called “string of pearls” ports in an around the Indian Ocean and companies at both ends of the Panama Canal.
China’s BRI is also supported by the State Administration of Foreign Exchange (SAFE), which manages China’s foreign exchange reserves and is the majority shareholder of China’s Silk Road Fund. According to Liu, SAFE manages more than $1 trillion in assets. SAFE’s leaders are also selected by the CCP.
Liu notes that China’s financial statecraft has included investing in Western companies involved in sensitive security areas, which caused Western governments to enhance foreign direct investment screening as a matter of national security. Liu believes that front line of the Cold War competition between China and the United States includes “nontraditional security domains like cyberspace, financial markets, and corporate governance.”
China’s sovereign funds, Liu explains, “are essential geoeconomic tools for the Communist Party of China and the Chinese state (the Party-State) to advance its strategic interests beyond China’s territorial borders without resorting to coercion.” She warns that if the United States fails to understand China’s sovereign fund strategy, it risks “surrendering its leadership in financial markets,” and, one can add, its leadership in the rules-based international order.