Oxford SWF Project

Ashby Monk

Anyone interested in China’s SWFs should read Spencer Anderson’s article in the Financial Times this morning, as it provides some interesting insights into the CIC, the NSSF, and their policies on governance and transparency.

CIC: The article suggests that the CIC is ”looking for opportunities amid the wreckage” of the global financial markets. However, it goes on to say that the fund has already invested all or most of its assets. So, until it receives new capital, the CIC may be doing some serious thumb twiddling. But this shouldn’t last for long; expectations are that the CIC will receive as much as $250 billion in the next couple of weeks.  Once it gets the cash, Anderson believes that the CIC will direct most of it to fund managers rather than investing directly in stocks and bonds. Given the CIC’s monopsonistic pricing power, this is probably a savvy move; just last week it allocated $1.5 billion to the secondary private equity market via three asset managers on very favorable terms.

NSSF: Anderson has a different take on the NSSF:

“For the NSSF, it is a different story. Its investment regulations are far stricter, with it permitted to directly invest only in bank deposits or government bonds. For other asset classes, it must use fund managers approved by the ministry of human resources and social security. It must hold at least 50 per cent of its assets in bank deposits and government bonds with ceilings of 10 per cent on corporate debt and 40 per cent on equities and equity funds. Overseas investments cannot exceed 20 per cent of its portfolio.”

Still, the $88 billion SWF is starting to put some of its money to work in private equity. In fact, it has permission to put 10% of its assets in domestic PE, but it has only put about $300 million to date. So, expectations are that this will increase in the near future.

Governance: Anderson closes his article with a discussion of the two funds’ compliance with the Santiago Principles:

“To date, most of the world’s other SWFs have made a complete mockery of the agreement, but some think the Chinese are embracing greater transparency.”

Indeed, the sense is that these two SWFs are serious about improving their governance. Anderson quotes Michael McCormack of Z-Ben as follows:

“The CIC is already fairly public and the reporting is reasonably timely. The funds aren’t like Calpers or Norway’s, but they will be in a couple of years. The CIC and NSSF have stated it as a goal. They want to be world leaders and the chairmen of both organisations have said they hope and plan within a few years to be within the same level of transparency.”

While Anderson doesn’t make note of it in his article, the SWF Institute released their latest transparency ranking today. In it, both the CIC and the NSSF score only marginally well. So, there is still some serious work to be done in this domain.

Apparently, one factor holding them back is the fear of being “front run“:

“With so many billions in assets under management, they have the ability to move markets. One manager says that if SWFs even suggest they are interested in an asset class, the market will price in their intentions. This is the main reason their approach will continue to be below the radar despite an increasing interest in transparency.”

I’m a big fan of transparency. And I personally think there are ways to have transparency without being front run. Still, if I was in charge of the biggest SWF in the world, I might be afraid of front running too…because it does happen.