http://blogs.cfr.org/setser/2008/06/20/chinas-sovereign-economic-development-fund/
One other thing that this illustrations is that using national sovereignty and national security has its limits. If China were thinking about buy mines and mineral rights in the United States, then sure the US government can and in fact should stop that it if doesn’t think that it is in the US national interest. However, it’s really tough for the US government to use US national security interests as an excuse to block in deal in which China buys stakes in Brazil and Australia.
In situations where you are dealing with small impoverished nations, you run into the problem that you have counterparties that aren’t able or willing to make a good deal and the problem of exploitation becomes a problem. In the case of Zambia or Uganda, you really have questions as to whether the government is acting in the Zambian and Ugandan national interest or whether they have the expertise to tell a good deal from a bad one. This definitely is not a problem with Australia, and I don’t think that it is a major problem with Brazil. Both those governments can and should say no if the deals that they are offerred are bad ones.
(Also the problem of insufficient expertise isn’t only a problem in developing countries. The state of Florida and a lot of municipalities has run into huge problems because they didn’t have the expertise needed to run some of their funds.)
Personally, the model I think that CIC should look very closely at is Calpers. However, I think that one thing that has changed in the last three months is that the financial problems on Wall Street have made the government concerned about having too little control over investment decisions.
My own thinking on these issues is very heavily influenced by Von Mises and his ideas on the socialist calculation problem, which is a very good explanation about why central planning doesn’t work for national economies.
Another point is that if CIC turns out to work well, there’s nothing that keeps the US from taking the $2 trillion in the social security trust fund and creating its SWF. I’m not worried too much about CIC “taking over the world.” I’m much more worried about CIC shooting itself.
One other way of thinking about this which tells you how much things have changed in the last few months is that you can think of the holdings of the Federal Reserve as an SWF which is invested in real estate and financial services.
Bernanke has crossed the Rubicon. The old rules are no longer constraints and everyone is busy trying to figure out what the new rules are.
Twofisf, I lost you a few times here. Familiarity with the Lange-Von MIses controversy seems to be present, but Mises has no solutions for the real world. Also, why should CIC emulate Calpers. Calpers is a pension fund, CIC fills space within the PRC financial mnagement&control apparatus and we do not know yet what its true mandate and yardsticks are. For the time being we have a small organization with someone at the top who has the trust of the leadership and plenty of experience in economic reform. Clearly not an international investment manager or a dealmaker. I stick to my intuition: a watchdog (and member of the elite, Zhu protege, but with some experience in the backwaters (like Hu incidentally). I think CIC may have as much to do with internal changes within the party/market interface as with the management of souvereign wealth. Incidentally, I still have a small library on socialist economics( a sideline from he past). Like vinyl records, some day it will be worth something.
Comment by RIEN Huizer — June 21, 2008 @ 10:15 am
Von Mises description of the impossibility of socialist calculation explains very nicely what was wrong with the system of centralized state-owned enterprises, and why Chinese SOE’s, which have to respond to market forces, basically work. It is true that Von Mises didn’t give an explanation of how to convert a system of centralized planning into a market economy, but China gradually figured it out.
Capitalism has basically two elements. Private ownership and a market pricing system. It turns out that the second is the crucial element of a successful economy and the first isn’t that important.
My view is that CIC should emulate Calpers because the PRC has a huge pension hole, and that there is already expertise in how to run a pension fund. I think that was pretty clearly the intention late last year.
Von Mises is extremely relevant here because the State Council has a lot of choices in what it can do with CIC, but all of those choices have numbers attached to them. If the State Council does X, it will cost or make Y. This isn’t possible when you don’t have a pricing system.
> For the time being we have a small organization with
someone at the top who has the trust of the leadership and plenty of experience in economic reform. Clearly not an international investment manager or a dealmaker.
You can hire international investment managers and dealmakers, and CIC was/is in the process of doing that. This can lead to huge principal-agent problems. The background of the CIC general manager is interesting because he does have Wall Street experience.
http://en.wikipedia.org/wiki/Gao_Xiqing
http://www.china-inv.com/
The interesting thing is that all of the postings on http://www.china-inv.com stop in February and it doesn’t normally take six months to choose an investment advisor which suggests to me that something major changed in late-March.
> Incidentally, I still have a small library on socialist economics( a sideline from he past). Like vinyl records, some day it will be worth something.
I think that works on socialist economics are worth a lot. Most people don’t quite realize how *different* a command economy is from a market economy, and how some of basic assumptions that people have about economies (like prices exist) have to be argued.
This lack of familiarity with socialist economics, means that people in market economies vastly underestimate the difficulty of creating a market economy, and how much the PRC has managed to accomplish over the last generation. The financial difficulties that we have now are nowhere as challenging as the ones that people faced in 1980 when they had no idea what to do.
Comment by twofish — June 21, 2008 @ 4:19 pm