Overall decline in Chinese financial assets stemming from a stagnant economy, COVID politics, rising political risk, etc The Evergrande Scandal overshadowed one of the most transformative buying sprees in the history of energy markets. China Investment Corporation (CIC), which manages a a staggering 31% of total global Sovereign Wealth Fund (SWF) capital under managementhas launched a global acquisition of energy assets that could reshape the international energy architecture.

Originally established to boost the return on China’s foreign exchange reserves and address domestic inflation by draining domestic revenue, CIC’s investment strategy has increasingly aligned with President Xi Jinping’s priorities. As Xi has consolidated power, China’s sovereign wealth funds have morphed from an economic engine to a tool of foreign policy, blunting shareholder returns with investment promises, foreign aid and economic pressure — in line with China’s “Go out“. Despite the claims energy represents only 2.69% of its portfolio, much of its investment in “broad public companies”, “industrials” and “commodities” is focused on energy targets. That makes the likely investment totals much higher, with China’s sovereign wealth funds controlling hundreds of billions in foreign energy assets by even the most conservative estimates.

Unlike Western publicly and privately owned and diversified investment companies, China’s SWF demonstrates a remarkable degree of policy consistency and has the power to secure long-term power purchase agreements with global energy suppliers—a capability that is lacking in most Western countries, including the United States . of states. This helped China secure long-term deals uranium reserves for his growing nuclear industry, traditional hydrocarbons, foreign hydropower, renewable resourcesand others in every corner of the world.

This quest for energy dominance is the basis of China’s investment policy. Guo Xiangjun, deputy chief investment officer of the $1.35 trillion SWF, he declared [energy] sustainability as an overarching theme in their investment approach at a recent forum. This is not surprising given the fact that China is 14Thursday Five-year planthe country’s overall macroeconomic plan, emphasizes energy security alongside military security.

Prioritizing energy in the investment portfolio of sovereign wealth funds is also in line with the practical requirements of China’s rapidly urbanizing population. China’s energy industry, such as coal-fired power plants, thrives in fast-growing urban areas due to high domestic demand. With Xi Jinping committing China to carbon neutrality by 2060, increasing energy market efficiency and reducing air pollution have become SWF’s top priorities.

The CPP elite, who control the country’s sovereign wealth funds, have different priorities than the Western shareholder. China’s sovereign wealth funds have two institutional advantages that potentially outperform their Western counterparts, which have allowed them to acquire such market share quietly and quickly.

First, China’s institutionalized long-term thinking prioritizes the political goals of the Chinese Communist Party (CCP) over shareholder preferences. This mindset allows China’s sovereign wealth funds to achieve a level of political focus rarely matched in the West. China has even developed “a valuation system with Chinese characteristics”, which offers bonuses to state-owned enterprises (SOEs) and private firms that are in line with national targets.

This long-term time horizon was particularly pronounced for investments in the civil nuclear industry. While Western actors have generally avoided nuclear power due to environmental, political and financial concerns, China has secured long-term power and resource purchase agreements and rapidly expanded its foreign capital investment in nuclear power through close cooperation between China’s sovereign wealth funds and various SOEs.

Second, China’s development and market size solidify it attractive destination for foreign investmentit provides it with sufficient domestic liquidity and allows sovereign wealth funds to maintain substantial domestic portfolios that can consistently draw on government support compared to other major sovereign wealth funds from resource-rich countries or other private competitors that often lack domestic markets.

Although China’s sovereign wealth funds and state-owned enterprises are separate entities serving different purposes, they operate under the same policy agenda set by the party and ensure strategic alignment. For example, China National Nuclear Corporation (CNNC) worked with CIC on investments creating controlling interests over 80% and 85% in the upcoming expansion of nuclear power in Argentina and Pakistan.

The interweaving of sovereign rights, shareholder demands and the strategic importance of energy complicate the geo-economics of sovereign wealth fund investment by introducing uncertainty and foreign and domestic political calculus. Previously, sovereign wealth funds were almost exclusively employed by mostly smaller, resource-rich countries with limited economic diversification in safe foreign markets to ensure the performance of the national economy and invest money with better returns on investment. Qatar, United Arab Emirates
United Arab Emirates
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and Norway comes to mind.

China’s sovereign wealth fund strategy has upended this calculus, and now sovereign wealth funds are forced to either adapt to China’s agendas, methods and competition, or accept lower returns.

Western stakeholders must realize that sovereign wealth funds have fundamentally changed and can no longer be expected prima facie to have a conservative value preservation agenda separate from geopolitical aspirations. There is also a need for more Western public-private partnerships specifically designed to counter China’s state-backed investment from sovereign wealth funds in the energy sector. Western governments and businesses must also try to cultivate longer-term time horizons, however tricky that may be, to risk being overruled by China.

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