US-China Commission Report - Fatal System Error

SECTION 2: CHINA’S CAPITAL INVESTMENT
VEHICLES AND IMPLICATIONS FOR THE
U.S. ECONOMY AND NATIONAL SECURITY
‘‘The Commission shall investigate and report exclusively on—
...
‘‘UNITED STATES CAPITAL MARKETS—The extent of access
to and use of United States capital markets by the People’s Republic
of China, including whether or not existing disclosure
and transparency rules are adequate to identify People’s Republic
of China companies engaged in harmful activities. . . .’’
Introduction
The People’s Republic of China (PRC) formally established the
China Investment Corporation (CIC) on September 29, 2007, to
manage and diversify its foreign exchange reserves beyond its traditional
investments in U.S. government dollar-denominated bonds.
With an initial loan of $200 billion from China’s central bank, the
People’s Bank of China, CIC instantly became one of the largest
sovereign wealth funds in the world.* 118 Most of the world’s 40
other sovereign wealth funds have existed without much controversy
for up to 50 years, but China’s entry into the sovereign
wealth fund market is remarkable for several reasons. For one,
China appears far less likely than other nations to manage its sovereign
wealth funds without regard to the political influence that
it can gain by offering such sizable investments. With an estimated
40 percent of its domestic economy still under government ownership
and control, China has long mixed economic and political goals
and is likely to do so with its international investments, despite
protestations to the contrary. 119
Many experts share a concern about the phenomenal growth of
other sovereign wealth fund assets and state capitalism generally.
The Commission’s charter limits its purview to specific matters related
to the U.S.-China economic and security relationship; hence
this chapter on China’s sovereign wealth fund necessarily focuses
on CIC and other Chinese state-owned entities. Our Report should
be understood in this context. In light of the current crisis in credit
markets and on Wall Street, the Commission also recognizes the
* According to the U.S. Department of the Treasury, a sovereign wealth fund is a ‘‘government
investment vehicle which is funded by foreign exchange assets, and which manages those assets
separately from the official reserves of the monetary authorities.’’ U.S. Department of the Treasury,
Semiannual Report on International Economic and Exchange Rate Policies (Washington,
DC: June 2007), appendix 3, p. 1. www.treas.gov/offices/international-affairs/economic-exchangerates/pdf/2007lAppendix-3.pdf.
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