The Regulatory Landscape for Sovereign Wealth Funds Investment and Lessons for China

Abstract

Sovereign wealth funds (SWFs) have become important players in the domestic and international market. The development of SWF investment, as the rise of ‘state capitalism’, is shaping the current global economic order and the trend of international capital flows. As state-owned investment instruments step into the financial market, SWF investments bring political, economic and regulatory challenges (particularly in the form of the Chinese state capitalism), while also providing opportunities for the global and national economies.

However, existing regulatory approaches in reality can only be regarded as ex-post and ex-parte reactions from more practical and political considerations. These approaches mainly consider the interests of host countries by imposing protective measures but neglect sufficient protection for SWFs, which may easily result in far-going protectionism. A more comprehensive and balanced view/approach is needed for the benefits of both sides. For China, addressing issues involved in SWFs investment is necessary, since China acts as the home country of several of the largest SWFs and the host country of foreign SWF investment. This thesis, therefore, aims to find a plausible approach/option to regulate SWFs internationally and in China by exploring and assessing relevant existing national and international regulations.

The thesis analyses the features of SWFs, and the nature of SWF investment, as well as the legal rationale and conflicting interests behind it. By undertaking doctrinal and comparative studies, this thesis analyses national regulations in relation to SWFs investment in the UK, US and China, and assesses international hard law and soft law approaches on general foreign investment and/or particular SWF investment. This thesis finds that unilateral actions vary from jurisdiction to jurisdiction while international measures do not explicitly reflect or incorporate issues of SWFs. The only exclusive approach is a kind of soft-law instrument without binding.

The thesis suggests that the phenomenon of SWFs requires a regulatory response for SWF investment not solely relying on practical and unilateral considerations but considering theoretical and practical perspectives under a broader framework. The regulations on SWF investment, in the thesis, cannot put an over-emphasis on restrictions without providing sufficient protection.

The thesis finds that although existing national and international regulations have flaws they are adequate to regulate SWF investment. Striking a balance between the interests of both sides is important, which needs further improvement of existing approaches. In this thesis, incorporating soft law guidelines into hard-law international investment treaties (IIAs) is a more appropriate way.

This thesis recognises the state sovereignty of the host state over economic activities in its jurisdiction. There is no one-fit-all suggestion for every country at the national level while there could be a plausible approach at international level and an appropriate option for China (as a selected case). By considering these factors, the thesis proposes three regulatory models for regulating or treating SWF investment at a general level, and puts forward further suggestions for IIAs and soft-law regulations.

The thesis tests proposed regulatory models in the context of China with an analysis of relevant legislative and economic reform in China. It finds that China adopts a flexible approach to regulate Chinese SWFs and foreign SWFs. It further concludes that in the short-term, the combined regulatory models could serve China’s policy demands while in the long-term, treating SWFs as other private investors (model one) helps to attract long-term and high-quality capital inflows. The thesis insists that the system of state ownership should not be biased and the focus should be put on the modern corporate governance of sovereign investors. By incorporating internationally accepted standards into domestic legislations, together with further domestic reforms, China would provide a better response towards SWFs investment and also other foreign investment.