April 08,2008

A Code of Conduct for Sovereign Wealth Fund "Stupid" Says CIC

By Thomas H. Wilkins
The transfer of economic power in the global financial markets has strengthened the hand of  China Investment Corporation’s (CIC) president as he calmly rejected the International Monetary Fund’s (IMF) call for a "code of conduct" for Sovereign Wealth Funds (SWF). Such was the unquestionable theme of a first-ever, go-public initiative by CIC, occurring on prime-time, American  television during an exclusive  interview in Beijing with Gao Xiqing, president of CIC. Speaking calmly, he said a code of conduct for SWF would only "hurt feelings" and "it’s stupid." According to preliminary figures, an estimated 10 million viewers watched the exclusive interview on the CBS program
60 Minutes, a frequent top 10 most-viewed television program of the week, according to Kevin Tedesco, spokesman for 60 Minutes.
 
Just weeks ago, the IMF’s executive board signed off on a code initiative which is expected to be presented  at the IMF’s October, 2009 Annual Meeting in Istanbul, Turkey. A roundtable discussion between the IMF and SWF begins in late April, leading to an expected draft by August.  According to a SWF white paper released in February by the IMF, "The macroeconomic and financial stability implications of SWFs fall squarely in the Fund’s mandate for surveillance? Already, the Abu Dhabi, the world’s largest SWF, and Singapore have agreed to basic principles of a code.
 
Proponents of a code want state-run investments not to be used for geopolitical purposes. Such arguments are seen in an article in the January/February issue of Foreign Affairs magazine, considered as America’s most influential publication on international affairs. Written by Robert Kimmitt, Deputy Secretary of the U.S. Department of the Treasury, this article argues that the most critical issue concerns "taking active control of private firms." In other words, the acquirer would not be passive.
 
On 60 Minutes, Gao said: "It’s our policy not to control anything." He denied any desired by CIC to be on the board of any of its holdings. When questioned to explain his reason for a passive, rather than active, management style, Gao said: "We don’t want to go in and say, ‘Ok, I think you should change this person or I think you should change this product.?That’s not our business."
 
When asked if his government would order him to cash in his chips when and if the Chinese government should have a dispute with the host country’s government, Gao replied: "It could be. But I seriously doubt that will happen."
 
60 Minutes interviewed during this program economist Peter Navarro of the University of California, Irvine and author of the Coming China Wars, who said that based on China’s  previous  behavior, China could "do mischief in our economy."     
 
Former Secretary of the U.S. Treasury, and former president of Harvard University, Lawrence Summers was interviewed. He said on 60 Minutes: "But in a way, their willingness to be interviewed and go on your show is probably not something they would do if they thought of themselves as having some nefarious purpose." While Summers indicated some trust of the Chinese motives was justified, he called for the Ronald Reagan expression to "trust and verify."  
 
Gao demonstrated "cool" confidence in his opinions without acting aggressive or boisterous. He acted self-effacing when it was disclosed that he became the first Chinese national admitted to the New York State Bar after graduating from Duke University School of Law. Gao had worked in Richard Nixon’s old law firm before returning to China, but he only claimed to know "a little bit" about the American banking system from a legal point of view.
 
When the interviewer, Lesley Stahl, pointed out the CIC glass building in Beijing was "very transparent," Gao agreed and figuratively replied: "That is what we meant to be." Stahl described this as a metaphor and Gao agreed, saying the Norwegian SWF would be its standard for transparency. He thought it was ironic that there were calls for transparency from SWF when there are no such standards for American hedge funds.
 
Another voice calling for a code is Committee on Foreign Investment in the United States (CFIUS), chaired by the Secretary of the Treasury, Hank Paulson. CFIUS seats representatives from the Defense, State, Commerce and HomeLand Security Departments in Washington. One of its main themes concerns national security implication of foreign acquisition of U.S. companies. This group was involved with reviewing the attempted acquisition of UNOCAL in 2005 by China National Offshore Oil Corporation.
 
Hank Paulson is seen as wanting a code in order to offset fears about acquirer’s  motives and to stop protectionist sentiment,  growing in the U.S. presidential campaign of Barack Obama. The leading Democratic candidate has condemned free trade and wants tax breaks for U.S. corporations which invest at home rather than abroad. As job growth fell 80,000 in the latest U.S. survey, many jobs outsourced to foreign factories led many to feel that a secure job is better than cheaper prices from imported goods. 
 
As U.S. banks and investment firms are suffering from large write downs, SWF are experiencing a transfer of power. Their  resources are needed by U.S. institutions. Hence, the old adage is still true: "He who has the gold makes the rules."
 
(Thomas H. Wilkins, CFA is an investment adviser and portfolio manager in Athens, Georgia, USA)

 

 

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