Understanding state capitalism through Sovereign Wealth Funds

“In our research, we use SWFs as an empirical entry point to understand the changing relations between the state and the market,” Dixon and Liu explain. “SWFs are state-owned investment funds, many of which invest across asset classes in major global markets. Since the early 2000s, the number of SWFs has exploded as has their total assets under management. Governments, particularly major commodity exporters and those with significant foreign exchange reserves, were looking for ways to invest their wealth to earn higher returns. Setting up SWFs were a means to achieve this,” Liu clarifies.

According to Dixon, “the emergence of and explosive growth in the number of SWFs worldwide has led to an unsettling debate regarding their legitimacy in the global political economy. This is largely because many originate from non-liberal political economies, such as China. Some suggest that SWFs represent the (re)emergence of state-led capitalism subject to geopolitical motivations that threaten free markets. Others consider SWFs as a counterbalance to market short-termism. Regardless, SWFs challenge the norm of markets being free of state interference.

By analysing the behaviour of SWFs, their interaction with different stakeholders at home and abroad, and how they are legitimised as financial actors in the global political economy, we aim to provide new critical insights into the contemporary relationship between the state and the market.”

SWFs as a political tool?

“Given SWFs are established by governments, some believe that these funds have political motives and that SWFs only invest in assets that are of geopolitical interest to a country instead of in assets that yield the highest returns. But it is hard to disentangle what is a political motive and what is a commercial one. Our research starts from the assumption that there is no clean separation between markets and states. In fact, states and markets co-constitute themselves. States have always played a role in creating, shaping and regulating markets,” Liu explains.

She adds to this that “the concern over the political motives of SWFs looms large in the case of China. One of China’s largest SWFs, the China Investment Corporation (CIC), has invested in many different sectors in Europe, from infrastructure to manufacturing, to real estate. The fear exists in Europe that many of these investments have a geopolitical motive. But this idea needs to be tempered by the fact that state-ownership will always imply a level of political interest, even when a SWF’s core mandate is to manage a nation’s wealth.”

“We can draw a good parallel here between Chinese and European investment policies,” Dixon claims. “Brussels adopted the European Green Deal in 2019 which aims to make Europe climate neutral by 2050. Coincidentally, the European Investment Bank (EIB; the European Union’s development bank/policy bank), has recently started investing in sustainable companies. Does that mean these investments by the EIB are politically driven? Or do these investments simply ensure high returns? If China prioritises investing in ‘green’ technologies and companies, and mobilises the CIC to do so, should we assume this is a politically driven investment instead of a commercial one? How is this different from what the EU would like to do?”

SWFs in China: political or commercial?

“I can understand European concerns over China,” Dixon says. “No country has developed as fast as China has. This has major implications for the global economic order. At this point, everyone wants to know what China is doing and what the implications are of China’s global rise. It is understandable that European countries are critical of - or at least concerned about - China’s growing economic presence at home and abroad. But this does not mean that China’s SWFs, or other Chinese state-owned enterprises for that matter, are necessarily guided by geopolitical motives.”

“Besides that,” Liu adds, “SWFs can invest in companies, but to take the CIC as an example, the vast majority of its holdings are non-direct, that is, they own less than 10% of the companies they invest in so they do not own enough to control these companies or what these companies are producing.”

Dixon agrees and continues: “if China wishes to make a geopolitical statement or gain geopolitical power in a certain area, it has other diplomatic means of doing this than via SWFs. This does not mean that Chinese state capital investments are free of geopolitical effects even if investments are made on an exclusively commercial basis. As we said before: it is very difficult to separate the state and the market, but the main goal of SWFs is to generate higher returns on investment.”

Providing insights

Via the SWFsEUROPE project, Dixon and Liu actively inform as many stakeholders as possible about SWFs and their relationship with the market. They regularly engage with key informants in Brussels about their findings, particularly the European Commission. It is not only important that policy makers know about the importance and impact of SWFs, Liu also hopes through her research to generate a deeper understanding of the role of the Chinese state in European and global markets. This is key to understanding how Europe can better engage with its largest trading partner.

By: Eva Durlinger