Sovereign wealth funds: China's potent economic weapon
SWFs can act as a nation's fiscal stabilizer, but can also be used to achievemore nefarious economic goals.
Sovereign wealth funds are neither good nor bad, but governments make them so. While the SWF of a country such as Norway may be cheered, those of China and Russia should rightly be feared by the United States.Skip to next paragraph
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SWFs are government-run investments financed by excess foreign reserves fueled by chronic trade surpluses. A SWF often acts as a nation's fiscal stabilizer. But China uses its excess foreign reserves in other ways – as a "loss leader" to achieve more nefarious economic goals. A perfect example is China's currency manipulation to boost its exports and create jobs – at the expense of American workers.
To keep the Chinese yuan pegged and undervalued, China first "sterilizes" its export dollars by issuing bonds to Chinese citizens at high interest rates. China's central bank then maintains the dollar-yuan peg by buying US bonds at substantially lower interest rates. While China earns a negative return, its financial loss is more than offset by China's boost in exports and Gross Domestic Product.
China also uses its foreign reserves as a political weapon. Whenever pressure builds in the US to curb China's currency manipulation or other unfair trade practices, Chinese government officials threaten to dump their vast US dollar reserves and stop buying US bonds. This "financial nuclear strike," which would cause interest and mortgage rates to soar and probably trigger a US recession, has effectively cowed US politicians.
Because China has repeatedly demonstrated its willingness to use foreign reserves as an economic and political tool, America has much to lose from the rapidly growing ability of Chinese SWFs to acquire controlling interests in US corporations. One obvious strategic danger is that China may seek to gain control of critical sectors of the US economy – from ports and telecommunications to energy and defense.
Chinese SWFs with controlling interests in US corporations may also try to offshore jobs, managerial best practices, and research and development to China. Even worse, they may also seek to promote technology transfer while nabbing customers in the US. The effect of offshoring jobs and poaching markets hits America's economy immediately – just ask Michigan. Moving America's R&D, managerial elite, and technologies to China significantly reduces future American productivity and growth.
While China poses the most direct SWF threat, Russia and its growing SWF are no strangers to state capitalism and brass-knuckled trade policies either. Exhibit A is Russia's bullying of Europe and Ukraine over access to Russian natural gas reserves at reasonable prices.