In the past few months India and Japan have both talked about setting up SWFs for the purpose of resource acquisitions overseas. And a recent report by the CIC (not that one, this one) suggests that the China Investment Corporation’s investments in Canada are all part of a political and development policy based on securing natural resources abroad. So, here’s my question: Does it matter if a SWF makes a strategic (i.e. politically motivated) investment in another country’s resource sector? Obviously, the Santiago Principles, which attempt to define the generally accepted principles and practices of SWF investment behavior, have a clear stance against this practice. But why?
I can see how a target country might be concerned if, say, a foreign country’s SWF was to take a controlling stake in some domestic firm, thereby giving it the power to redirect resources to the SWF’s sponsoring country or sell these resources at a discounted rate. The firm would be made worse off, which would have knock on effects for the local community. But that’s a worst case scenario and, if we’re honest, a straw man argument. The local authorities could ensure this never happens in a variety of ways (see Potash). Moreover, if the investment was a minority stake, would it have any geopolitical significance at all?
I’m not sure. In fact, it may serve the interests of the target country to have a politically motivated SWF investing in its firms and industries. After all, a politically motivated SWF will ascribe a higher value to the firm than it might otherwise do if it was using only cash flows for the valuation.
Anyway, this discussion was inspired by a report (“The Dragon Returns: Canada in China’s Question for Energy Security”) written by Wenran Jiang and published by the Canadian International Council. It’s really quite intriguing, as it implicitly accepts that China’s investments are politically motivated and considers ways in which Canada can still work with the Chinese (instead of over-reacting and shutting them out of the Canadian market completely).
In effect, Jiang suggests that China’s investments in the resource sector are part of a politically motivated “going out” strategy tied to a development model based on maximizing exports, discouraging imports, and enriching the state:
“…China’s “miracle” GDP growth has come with a heavy price tag, including the growing hunger for more and more energy and natural resources, leading to massive extractive activities both inside China and around the world…Accompanying this heavy industrial structure is a tremendous waste of energy…to generate every 10,000 yuan of GDP (C$1,519), China uses as much as three times the energy as the global average.”
“…one major structural requirement for China’s continuous industrialization drive is to enter energy and resource rich countries to secure supplies. Given Canada’s rich endowment of energy, minerals and other key resources, it is only natural that Chinese enterprises see the country as a major frontier to satisfy China’s need. ”
That’s right. Canada has the second largest proven oil reserves behind Saudi Arabia. And it wouldn’t come as a shock if the CIC were investing according to a “double bottom line” (for profit and the nation). After all, back in 2010 Sheng Sheng Songcheng, a representative of the People’s Bank of China, said China should use its forex reserves to acquire strategic assets around the world, such as oil.
The real question is whether this motivation should be a source of concern. GAPP 19 would suggest that, yes, it is a concern. But, again, I’m not so sure. Here is my question: Should we treat an SWF with a double bottom line (returns and national development) any differently than we currently treat pension funds with double bottom lines (returns and community development)? In fact, some pension funds are trying to implement triple bottom lines — people, planet, and profit — that are pushing the boundaries of what qualifies as a ‘profit motive’.
Anyway, I don’t have the answer. But I can say that it seems reasonable that a sovereign fund might make investments that serve both the interests of the fund and the nation. And if that is the case, more discussion and engagement between the authorities representing the buyers and sellers may be needed, but it doesn’t warrant protectionism. (After all, nobody seems too concerned with the investment activities of Mubadala.) Moreover, in a certain manner of thinking, every investment a SWF makes has a political motivation: to make money for the sovereign.
This post originally appeared on the Oxford SWF Project website.