The term ‘sovereign wealth fund’ (SWF) evokes images of an unfathomably large pot of cash. This cash is poured into global capital markets and real estate in an insatiable search for returns. While some funds immediately spring to mind — Saudi Arabia’s Public Investment Fund (PIF); the Government Pension Fund of Norway; and perhaps even the China Investment Corporation (CIC) — the question is whether they were all created equal.

In her second book, Sovereign Funds: How the Communist Party of China finances its global ambitions, Zongyuan Zoe Liu reveals how the Chinese government established SWFs using leverage, not revenues from natural resources, to mobilise state capital at home and abroad.

What she terms the Chinese ‘sovereign funds complex’ comprises two main funds and a string of affiliated investment funds that, as of end of 2019, managed a combined total of $2tn in assets: the CIC, Central Huijin Investment (which is now part of the CIC) and funds associated with the State Administration of Foreign Exchange. 

China is unusual among SWFs. Central to its difference, Ms Liu explains, is that China’s funds are ‘sovereign leveraged funds’ (SLFs), as they are not capitalised by commodity revenues, but rather by complex structures involving bond issuance, implicit debt and foreign reserves. Through these SLFs, the Chinese government financed equity investments, Belt and Road projects and other strategic objectives outlined by the ruling Chinese Communist Party (CCP).  

These funds have allowed the government “to extract the benefits of participation in global markets organised around the norms of shareholder capitalism without the Chinese state relinquishing its control over strategic firms and industries”. 

“SLFs have strengthened the [CCP’s] leadership over the Chinese economy and increased China’s geopolitical capacity abroad,” Ms Liu writes.

A point she stresses in the book is that such funds were “born from crisis”: notably fears following the 1997 Asian Financial Crisis of insufficient foreign currency reserves and systemic fears in the wake of the 2008 crash. At different periods in time, these external market-based shocks compelled the Chinese government to set up sovereign funds as a way of containing market volatility. Subsequently, they have been used for “geoeconomic” influence abroad. 

In a similar vein, in The Belt Road and Beyond: State mobilised globalisation in China, 1998–2018, fellow China-born, US-educated scholar Min Ye starts from the premise that it was a spell of crisis in the early 2010s that catalysed China’s overseas infrastructure project. 

Like Ms Ye, Ms Liu eschews the idea that China has a “grand strategy” that it promotes and then implements. Rather, through the pages of Sovereign Funds, one gets a sense of the chaos inherent in the unwieldy Chinese state apparatus. And while the book is exceptionally well-researched, I find myself wanting more intimate detail about the CCP.

Sovereign Funds raises broader questions about the presence of such funds in the financial system and the role that can be played by state finance in the global marketplace. But above all else, it offers an insightful look into the permutations of the Chinese state in response to privatisation. 

This article first appeared in the August/September 2023 print edition of fDi Intelligence.