The Political Economy of Financial Regulation

I will be speaking at “The Political Economy of Financial Regulation” conference organised by the CUHK, Faculty of Law

The Conference will explore the following topics:

  • Asian financial development and the ‘Washington Consensus’
  • Bailouts, rescues, bail-ins and living wills in the financial industry
  • Lobby power over making laws, rules and market structure
  • The law and politics of monetary policy in a global financial system
  • Industry capture of financial regulators
  • Role of law in constituting the financial industry
  • Problems of self-regulation in standard settings (LIBOR and FX fixes)
  • State-owned enterprises in and connected with the financial system

My presentation will focus on “The Santiago Principles and the International Forum of Sovereign Wealth Funds -Reshaping International Economic Governance through Atypical Rule-making”

This paper provides a comprehensive analysis of the evolution of the Santiago Principles (the Principles) from best practices to quasi-legal instruments, focusing on the role of the International Forum of Sovereign Wealth Funds (IFSWF). More precisely, this paper demonstrates that the changes of the internal structure of the IFSWF and the increasing role that it has assumed in enhancing the effectiveness of the Principles are transforming it from a informal and voluntary group into a new international financial authority for sovereign wealth funds (SWFs) that interprets the Principles, oversees their implementation, and provides guidance to states to incorporate them when establishing new SWFs.

The Principles were released in October 2008 by the International Working Group of Sovereign Wealth Funds (IWG-SWF) to address political, economic and legal concerns caused by the expansion of SWFs’ investments and to support free flows of capital. The IMF, interacting with the G20, led a sui generis and ad hoc process that involved the representatives of the SWFs, the WTO, the OECD and other stakeholders in the discussions of the IWG-SWF. Subsequently, the IFSWF was established, as an informal and voluntary group, under the aegis of the IMF to pursue the goals set by the Principles. In seven years the IFSWF has evolved into an independent body with a broader participation of SWFs, an internal structure and strategic goals to reach by 2018.

This paper firstly examines the ad hoc, multilevel negotiation process and the adopted Principles. Secondly, it critically assesses the implementation of the Principles by the SWFs and the role of the IFSWF as a new international financial authority. Thirdly, this paper focuses on the incorporation of the Principles in recent negotiations of free trade agreements and their impact on international rule-making. Fourthly, it draws key lessons from the review mechanisms of existing international bodies in order to improve the Principles’ implementation process and develop a proactive role for the IFSWF in order to address other challenges of SWFs’ investments improving the international regulatory framework. Finally this paper will help to clarify the role of the IFSWF in international economic governance.

Through the links can find the abstracts and the programme


The Regulation of Chinese SOEs and Italy

by Susan Finder

In the past year, the Chinese government has eased restrictions on Chinese companies investing overseas. Italy has become a significant target for investment by large Chinese state owned companies (SOEs), particularly those directly administered by the central government (central SOEs). Under Chinese law, SOEs are subject to special regulatory regime. What does this mean for Italian companies that are targeted for acquisition, before and afterwards?

Under Chinese law, SOEs are the corporate face of government agencies. Central SOEs are the corporate face of the central government. The government appoints, manages, and supervises SOEs for the most part through the State-Owned Assets Supervision and Administration Commission (SASAC). Jiang Jiemin, the former head of SASAC was removed office in September, 2013, and was recently put on trial on corruption charges. The current head of SASAC is Wang Yi, who comes from a Communist Party disciplinary inspection background.

As highlighted by their regulatory structure:

  • SOEs are required to implement Chinese government policy in their investments and operations;
  • SOE leadership is appointed on a combination of political and professional grounds;
  • Corporate decision-making involves a complicated approval process and procedures for the acquisition;
  • SOE leadership is monitored through typical Communist/Party methods rather than by shareholders and SOEs are subject to limited transparency

Implementing government policy

Chinese SOE law requires an SOE to comply with national industrial policies when making investments and their operations, whether domestic or overseas. The most concise statement of Chinese industrial policies for Italy can be found in the Chinese-Italian Cooperation Plan signed by leaders of both countries in 2014.

Senior leadership of SOEs

The senior management of SOEs is appointed by SASAC, generally in coordination with the personnel division of the Communist Party, the Organizational Department. Therefore business knowledge and experience may be less important than political qualifications.

Multilevel regulatory oversight

Overseas investment by SOEs has been relaxed over the past year. Under current regulations, only offshore investment projects in which the amount of Chinese investment reaches or exceeds USD 1 billion or is in a sensitive sector or sensitive jurisdiction is subject to approval by the National Development and Reform Commission. Otherwise the transaction must be registered with China’s Ministry of Commerce. The Pirelli acquisition would have been one of transactions subject to government approval.

Corporate decisionmaking

These excerpts from a blogpost by a corporate executive summarize SOE corporate decision-making:

In state-owned companies, it is always a group of people at the top who make big decisions instead of one individual.

Management is always top down. Management makes the decisions and asks employees to comply and execute. Any innovation and breakthrough ideas typically originate from the management level. Managers are highly respected by subordinates and are rarely challenged.

Oversight of SOEs

Because Chinese SOEs are government owned, they are subject to monitoring in ways that are similar to other government agencies. The principal ways are:

  • Inspections by the Communist Party disciplinary agency, the Central Commission for Disciplinary Inspection;
  • Auditing by the National Audit Office;

National Audit Office

Although the SOE Law requires auditing by the National Audit Office, in March, 2015, Mr. Dong Dasheng, the former head of the National Audit Office, told a Chinese national newspaper that the $698 billion (at the end of 2013) of China’s SOE overseas assets were virtually unaudited. He revealed that the unspoken rule was that the National Audit Office could audit (directly or indirectly) only 57 of the 118 central SOEs, which meant that most were unaudited. He linked the lack of audit oversight to huge losses of state assets, widespread corruption, and short-term decision-making by central SOE leaders.   Mr. Dong highlighted that the National Audit Office had recommended stationing its auditors in those central SOEs, but the suggestion was opposed and called on the national leadership to establish an ongoing audit system SASAC has now appointed seven audit firms, including PWC, to audit some offshore assets. By contrast, the state investment companies of Singapore are either audited by the Singapore’s Auditor-General or by international audit firms.


The CCDI, which is the same institution as the Ministry of Supervision, is taking the lead in the anti-corruption drive. Overseas assets of SOEs have only recently attracted the CCDI’s attention. In February, 2015, the CCDI announced that 26 central SOEs were selected for the first round of inspections and released a roadmap to cover all the SOEs in key industries. The inspection uncovered widespread corruption.

SOE transparency

Limited transparency

Chinese SOEs are subject to limited public oversight in their activities. Although the SOE law states that information about SOE investment will be made known to the public as required by law, the amount of transparency is limited.


Italian companies that are or have been the target of Chinese SOE investment need to monitor Chinese government developments. In the short term, some SOE executives that have not realized the direction of Chinese government policy may look to benefit themselves and their family in the course of a transaction. However, this may put the transaction at risk, as it may be selected by PWC or other auditors for review, or alternatively, by the CCDI’s inspectors.

For those Italian companies that have been acquired, in whole or part by a Chinese SOE, it does not appear in the short term that the regulation or transparency of those companies will change significantly, and acculturation to the culture of the new owners will be necessary. In the longer term, the Chinese government may decide that reducing widespread corruption in SOEs will be reduced if government auditors are stationed in SOEs and are dispatched regularly to review the finances of offshore subsidiaries. It seems less likely that Chinese legislation will be amended significantly to make the operations of offshore SOEs will be made more transparent to the public and instead foreign law reporting requirements are likely to be a more robust tool for reviewing their operations. The Chinese taxpayer and target jurisdictions would benefit from greater transparency. Singapore could be a useful model.

This article has been published in Italian in OrizzonteCina Vol.6 N.2 Marzo-Aprile 2015

Susan Finder is a visiting fellow at the Center for Chinese Law at the Hong Kong University, Faculty of Law. Her blog is Supreme People’s Court Monitor.

IPIC, the first SWF to file an ICSID claim

International Petroleum Investment Company (IPIC), a state controlled entity (SCE) from the United Arab Emirates (UAE) and its Dutch subsidiary Hanocal Holding B.V filed a request of arbitration at the ICSID against the Republic of Korea seeking compensation of 183.8 billion won on taxes paid in 2010.

The dispute started when IPIC and Hanocal sold their 70% stake in Hyundai Oilbank to Hyundai Heavy Industries for around 1.8 trillion won. The Korean National Tax Service withhold 10% as a sale tax on the basis that Hanocal cannot benefit of the double tax agreement between the Netherland and the Republic of Korea. The Korean tax authorities perceive Hanocal as a shell company and do not grant the tax treaty benefits. Since then Hanocal has unsuccessfully tried the case in front of the domestic courts.

Sheikh Zayed Bin Sultan Al-Nahyan, the founding father of the UAE, established IPIC in 1984 in Abu Dhabi with the participation of the Abu Dhabi Investment Authority (ADIA) and the Abu Dhabi National Oil Company. The goal of the entity is to use the wealth deriving from natural petroleum to build a modern, diversified economy for the benefit of future generations. Since 1986 the entity is wholly owned by the Government of Abu Dhabi and nowadays operates assets globally for an estimated value of $ 68.4 billions managing investments in companies that operate across the hydrocarbon value chain, including exploration and production, shipping and pipelines, downstream retail and marketing, petrochemicals, power and utilities as well as industrial services. Furthermore it has interests in renewable energy, infrastructure, environmental projects, real estate, aviation, automotive and financial services. As a matter of fact IPIC is one of the seven sovereign wealth funds of United Arab Emirates. However differently form ADIA, it is not a member of the International Forum of Sovereign Wealth Funds (IFSWF) and has not agreed to comply with the Santiago Principles. Nevertheless IPIC does very well in complying with transparency standards. It ranks high in the Linaburg-Maduell Transparency Index (a method of rating transparency in respect to sovereign wealth funds) scoring 9/10. It does very well also on economic performance. Moody’s, Fitch and Standard & Poor’s graded IPIC economic performance in 2013 very well according respectively A3, AA, AA.

By starting this investor state arbitration IPIC becomes the first sovereign wealth fund to rely on the ICSID tribunal to solve a dispute with the host country. In 2010 Temasek, after losing an antitrust case in domestic courts in Indonesia, threatened to take the case to international arbitration but there hasn’t been any news of a case being filed. Previously few SCEs have successfully tried their cases in front of the ICSID tribunals. In those occasions the respondent countries have raised issues on the jurisdiction related to the public ownership of the SCEs. The arbitrators have focused on the commercial purposes of the investment made by the SCE and have granted standing in front of the tribunal to the SCEs. It will be interesting to see if the respondent will raise the jurisdiction issue in this case and what will be the tribunal decision.

Assessing the relevance of multilateral trade law to sovereign investments: Sovereign Wealth Funds as “investors” under the general agreement on trade in services

Julien Chaisse‘s article Assessing the relevance of multilateral trade law to sovereign investments: Sovereign Wealth Funds as “investors” under the general agreement on trade in services was published in the International Review of Law on the Special Issue on Sovereign Wealth FundsThe Special Issue is open source and the articles are free to download.


The variety of investments made by powerful Sovereign Wealth Funds (SWFs) is often directed to the globally booming service sector which is regulated by the General Agreement on Trade in Services (GATS). This paper analyses the scope, substance and procedural rights which may benefit SWFs. The basic principles of World Trade Organization (WTO) law provide a legal framework for regulating SWF investment while the members’ specific commitments may provide significant liberalization. These positive elements for SWFs are tempered by the existence of exceptions and the relative shortcomings of state-to-state dispute settlement in the WTO and the lack of retroactive remedy. However, the paper shows that far from being perfect and complete, the GATS provides an international basis for SWFs to devise their investment strategies and an ideal forum in which to obtain further liberalization in current negotiations.

Link to the article 

A change of strategy for SWFs

SWFs presence in the global markets has become a routine. Every day we read that a significant number of SWFs buy or sell shares of many companies located in different countries. Even though this activism, sovereign funds have been keeping a low profile, acquiring minor participations. They haven’t interfered with the management choices and they have in this way clearly behaved as passive investors.

Recently however something has changed.  After the two unfortunate events that hit Malaysia Airlines, Khazanah Nasional, the country’s SWFs have decided to buyout the other shareholders, acquire full control and delist the company as part of an ongoing restructuring plan. In Bulgaria, the State General Reserve Fund, a SWF from Oman that owns 30% of the shares of the Corporate Commercial Bank has been discussing with the Bulgarian government a plan to stabilise the situation and rescue the bank. Last week GIC, one of the Singaporean sovereign funds acquired 50% of the assets of RAC becoming a strategic investor in the company together with the Carlyle Group.

These are three distinct events with significant differences with each other but they clearly show an emerging trend on the behaviour of SWFs, they indicate a shift from passive investors to more active investors. In a recent interview also Alasdair Warren, head of financial sponsors group for EMEA at Goldman Sachs commenting on the agreement between Carlyle Group and GIC said that it is likely that more acquisitions similar to this one are going to happen.

Copyright © 2014 Dini Sejko

SWFs market size

In the recent years investments made by SWFs has dramatically increased and so has their market size. It was $ 3,265 trillion in september 2007, and despite the global financial crisis or thanks to it, SWFs market size has more than doubled in June 2014 reaching $6,609 as it can be seen from the graph. The market size which has been floating during the years of the crises, has grown sharply by $1,12 trillion since June 2013.

It should be kept in mind that these amounts do not reflect the real size of the market of SWFs due to the lack of transparency that characterises many of them.

SWFs market sizeElaboration on SWFI data

Copyright © 2014 Dini Sejko

Enhancing Global Presence

The number of SCEs involved in foreign direct investments is increasing at a rapid pace as it is also increasing the amount of wealth that they manage. In its last estimation the Sovereign Wealth Fund Institute assessed it at $ 6,3648 trillion. Simultaneously with their number and size is also growing their global presence. Lately we have experienced a proliferation of their offices all around the world.

The most active in this sense is the Singaporean fund Temasek Holdings with a widespread presence in Asia with offices in Beijing, Shanghai, Hong Kong, Hanoi, Mumbai and Chennai. It has only one office in the European Union, in London and three offices in the Americas, in New York, Mexico City and Sao Paolo. Also the other Singaporean fund GIC is keeping pace with Temasek having offices in ten cities worldwide.

The Norwegian Government Pension Fund Global has a good presence in Asia with offices in Shanghai and Singapore and is very active in the Hong Kong stock exchange. It has offices also in London and New York. The Chinese Investment Corporation has offices in Hong Kong and Toronto.

The Gulf based funds are continuing to have only the resident headquarters with the exception of Mubadala Development Company that has set an office in Singapore.

Also the Canadian Pension Plan Investment Board has an extended global presence with offices in New York, Sao Paolo, London and Hong Kong.

For the moment the most attractive cities for the new offices of these funds have been Beijing and international financial centers such as Hong Kong, London, New York and Singapore.

This increased presence is a clear indication of their intention to massively expand their investments in a closer relationship with their host countries, ensuring a better protection of their investments through the available treaties. It will also provide them with an improved control on the management of the investments that they have already made and a better access to information for future investments.

Copyright © 2014 Dini Sejko