China’s Sovereign Wealth Fund In Energy Markets Expansion

Overall declines in Chinese-held financial assets stemming from a sluggish economy, COVID policies, increasing political risk, and the Evergrande Scandal have overshadowed one of the most transformative buying sprees in the history of energy markets. The China Investment Corporation (CIC) which manages a staggering 31% of the world’s total Sovereign Wealth Fund (SWF)- managed capital, has embarked upon global energy asset acquisition spree that could remake international energy architecture.

Established initially to enhance returns on China’s foreign exchange reserves and address domestic inflation by syphoning off domestic revenue, the CIC’s investment strategy has increasingly conformed to reflect the priorities of President Xi Jinping. As Xi consolidated power, China’s SWF transformed from an economic engine to a foreign policy instrument, blunting shareholder returns with investment promises, foreign aid, and economic pressure — in line with China’s “Going Out” policy. Despite claiming energy only represents 2.69% of its portfolio, much of its investment in “broad public companies,” “industrials,” and “raw materials” is aimed at energy targets. This raises likely investment totals much higher, with even the most conservative estimates putting China’s SWF controlling hundreds of billions in foreign energy assets.

In contrast to the Western publicly and privately held and disparate investment companies, China’s SWF demonstrates a remarkable degree of policy consistency and wields power to secure long-term power purchase agreements with global energy suppliers—a capability lacking in most Western countries, including the United States. This helped China secure long-term deals for uranium supplies for its growing nuclear power industry, traditional hydrocarbons, foreign hydropower, renewables, and more in every corner of the globe.

This quest for energy dominance underlies Chinese investment policies. Guo Xiangjun, deputy chief investment officer of the $1.35 trillion SWF, declared [energy] sustainability as a prevailing theme in their investment approach at a recent forum. This is unsurprising given that China’s 14^th Five-Year Plan, the country’s overall macroeconomic blueprint, stresses energy security alongside military security.

Prioritizing energy within the SWFs’ investment portfolio also aligns with the practical demands of China’s rapidly urbanizing population. Chinese energy industry such as coal-fired power plants has thrived in rapidly growing urban areas due to high domestic demand. As Xi commits China to carbon neutrality by 2060, increasing energy market efficiency and reducing air pollution have become top priorities for the SWF.

CPP elite that controls the country’s SWF has different priorities than Western shareholder. Chinese SWFs possess two institutional advantages that potentially outcompete their Western counterparts, which enabled them to gain such a market share silently and rapidly.

Firstly, China’s institutionalized long-term mindsets prioritize the political objectives of the Chinese Communist Party (CCP) over shareholder preferences. This mindset enables Chinese SWFs to achieve a level of political focus that the West rarely matches. China has even developed a “valuation system with Chinese characteristics,” offering premiums for State Owned Enterprises (SOEs) and private firms that align with national objectives.

This long-term time horizon has been particularly pronounced in civilian nuclear industry investments. While Western actors have generally shied away from nuclear power due to environmental, political, and financial challenges, China has secured long-term power and resource purchase agreements and rapidly expanded its foreign capital investments in nuclear power due to the close cooperation between China’s SWF and various SOEs.

Secondly, China’s development and market size cement it as an attractive destination for foreign investment, providing it with sufficient domestic liquidity and allowing SWFs to maintain substantial domestic portfolios that can consistently draw governmental support compared with other notable SWFs from resource-rich countries or other private competitors that are often lacking domestic markets.

Although Chinese SWFs and SOEs are separate entities serving distinct purposes, they operate under the same political agenda set by the Party, ensuring strategic alignment. For instance, the China National Nuclear Corporation (CNNC) cooperated with the CIC for investments creating controlling stakes of over 80% and 85% in forthcoming nuclear power expansions in Argentina and Pakistan respectively.

The intertwining of sovereign rights, shareholder demands, and the strategic significance of energy complicate the geoeconomics of SWF investment s by introducing uncertainty and foreign and domestic political calculus. Previously, SWFs were almost exclusively employed mostly by smaller, resource-rich countries with limited economic diversification in safe foreign markets to ensure national economic performance and invest money with better returns on investment. Qatar, UAE
UAE
, KSA
KSA
and Norway come to mind.

China’s SWF strategy has upended this calculus, and now SWFs are forced to either adapt to Chinese agendas, methods, and competition, or accept lower returns.

Western stakeholders must realize that SWFs have fundamentally changed and can no longer be expected prima facia to have conservative value preservation agenda divorced from geopolitical aspirations.. There is also a need for more Western public-private partnerships explicitly designed to counter China’s state-backed SWF investments in the energy sphere. Western governments and businesses must also attempt to cultivate longer-term time horizons, however tricky it may be, lest they risk being outcompeted by China.