Thursday, October 16, 2008
I just finished a paper for a conference at Cornell organized by Kirshner and Helleiner. They asked me to write a piece on the CIC, which may be timely because the fx reserve in China just increased to 1.9 trillion. I basically evaluated whether it would be realistic for the CIC to replicate the performance of Temasek or GIC. My conclusion was that the political incentives facing CIC managers are vastly different from those facing Singaporean managers. I attach the executive summary below. If you are interested in the full paper, please email me.
A Creature of the Government: the China Investment Corporation
Department of Political Science, Northwestern University
* Despite the fervent wish of the CIC’s management team, this entity will not be able to replicate the concentrated focus on profitability driving Singapore’s GIC and Temasek Holding.
* The underlying reason is that CIC bureaucrats are governed by a factionalized and constantly changing elite leadership, which contrasts sharply with the stable dominance of the Lee family in Singapore. This produces the following pathologies:
* With bureaucratic rivals and different factions represented on the CIC board, the relevant players take into account the impact of a major investment on bureaucratic and factional balance of power.
* When disagreements emerge between bureaucratic or factional rivals, deadlock ensues in the CIC.
* To the extent that the political leadership agrees on major actions undertaken by the CIC, it is likely to be a political move where profit is not the main consideration.
* With much shorter time horizon than managers of the Singaporean funds, CIC managers will seek short-term political benefits, which may include paying off relevant political actors to further their post-CIC careers.
* The Blackstone debacle and subsequent failed investment in Morgan Stanley squashed any initial hope of relative autonomy. The current declining market further weakens CIC managers’ incentive to do well, since it is very easy to blame the market.
* Behavioral expectations in the future include:
* CIC will avoid large stakes in the midst of the turmoil, but will instead instruct its fund managers to take small stakes in a group of financial institutions.
* CIC may form additional private equity joint ventures because they allow CIC to acquire major stakes while spreading political risks and minimizing media scrutiny.
* CIC will become a major lobbying group on behalf of the major state banks because over half of its capital is invested in Chinese banks.
* Although foreign policy will be a minor consideration for CIC managers, even the mobilization of a small share of CIC and SAFE assets can make a substantial difference in developing countries.
* With the formation of CIC subsidiaries, China now has a maze of channels to project its financial resources for foreign policy objectives.
* For Western policy makers, the main challenge will be to keep track of an increasing array of financial institutions related to the Chinese government and to discern patterns of coordinated actions that may have strategic implications.