Lessons from China’s Sovereign Leveraged Funds
At a forum on Dec. 6, I had the privilege of reacting to Dr. Zongyuan Zoe Liu’s book, Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions. In her book, Dr. Liu provides insights into China’s unique model of Sovereign Leveraged Funds (SLFs) and how they have contributed to China’s global ambitions.
Dr. Liu’s research, which involved 105 interviews with key participants over eight years, sheds light on the evolution of the Chinese model and its implications for other countries. This article focuses on the lessons that the Philippine sovereign fund can learn from China’s SLFs.
The Uniqueness of the Chinese Model
China’s SLFs address several key issues, including reduced international reserves and the avoidance of the ‘Dutch disease.’ By converting highly liquid financial assets into longer-dated strategic assets, China reduces inflationary pressure and raises the risk exposure of low-risk capital. This concept of leverage, backed by forex reserves, explains China’s high debt to GDP ratio despite having substantial international reserves.
Implications for the Philippine Sovereign Fund
The Philippine sovereign fund, known as the Maharlika Fund, can draw valuable lessons from China’s SLFs. Firstly, the seed capital for the Maharlika Fund was provided by state banks, impacting their capital ratios. In hindsight, direct capital injection from the National Government, as done by India and Indonesia, could have been a better approach.
Secondly, China’s SLFs have gone through a learning process, evolving from passive owners to active shareholders. This evolution was facilitated by partnerships with prestigious global investors and allowed the SLFs to gain expertise and influence in strategic directions.
Governance, Transparency, and Long-Term View
China’s SLFs have demonstrated the importance of governance, professionalism, and transparency. The China Investment Corp (CIC), the most transparent of the Chinese SLFs, signed up to the 24 Santiago Principles with the International Forum of Sovereign Wealth Funds. CIC also established an internationally recognized advisory council, enhancing its credibility in the global investment community.
Furthermore, China’s SLFs highlight the need for a long-term view and the acceptance of mistakes. CIC experienced initial financial losses but eventually achieved mutually beneficial results. This emphasizes the importance of realistic expectations and not being carried away by hype.
Conclusion
China’s Sovereign Leveraged Funds provide valuable insights for the Philippine sovereign fund. By analyzing the unique Chinese model, the Philippine fund can learn lessons on governance, transparency, and long-term investment strategies. It is essential for the Maharlika Fund to prioritize direct capital injection, learn from China’s evolution, and maintain a realistic outlook to achieve its goals.
