This presentation is a snapshot of my current book chapter. My current research has been motivated by a simple empirical puzzle: SWFs are predominantly found in commodity-exporting countries, so how is it that China — a country without significant natural resource exports — is home to several sovereign wealth funds (SWFs) that collectively manage more than $2 trillion in assets?  While some scholars point to China’s excessive foreign exchange reserves as the cause of China’s SWFs, my research finds that this a necessary but insufficient condition: China and Japan are both countries with an excessive amount of foreign exchange reserves, but why has China chosen to use its reserves to establish several SWFs but Japan has not?

To solve the empirical puzzle mentioned above, I examine when, why, and how China used its foreign exchange reserves to capitalize several state-owned investment funds for the purpose of advancing a state-prioritized agenda in global financial markets. To highlight major distinctions in capital structure and purpose of asset allocation between Chinese SWFs and traditional commodity-based SWFs, I use the term sovereign “leveraged” funds (SLFs) to describe China’s foreign-exchange-reserves-based SWFs. More specifically, the label “leveraged” is to highlight two distinctive characteristics of the Chinese SWFs: 1) they are initially capitalized by either encumbered assets through taking on financial leverage through the issuance of special government bonds or by taking on economic leverage through capital gearing and increasing the risk profile of what used to be low-risk-bearing assets; 2) their asset choices are not entirely market driven but follow the pattern of changes in state priorities and national agenda.

Because the capitalization of certain Chinese SLF involves reallocating capital under the control or administration of the People Bank of China, China’s central bank, into an entirely different government-owned investment institution that is under the purview of the Ministry of Finance, the evolution of Chinese SLFs tells the story of the politics of the management of China’s massive foreign exchange reserves. However, in spite of all the bureaucratic power struggles, the senior members running the entire Chinese SLFs Complex are all the Party’s Men. This highlights the Party’s control and influence over Chinese SLFs’ global activities and the purpose of their overseas investment and asset acquisitions.

In this talk, I will present the development of China’s SLFs starting with the creation of Central Huijin, followed by the launch of CIC, and then the creation of eight SAFE-affiliated funds. All of these funds have been capitalized by direct or indirect transfers from China’s foreign exchange reserves. Together they manage more than $2 trillion in assets. These assets can be thought of as “shadow reserves” because they do not count towards official reserves statistics and their management is not bound by the same legal restrictions as official reserves. A key takeaway from this presentation is that the defining characteristic of China’s SLFs is the use of shadow reserves in the practice of financial statecraft in global financial markets. In this respect, the rising activism demonstrated by China’s SLFs represents an incremental increase in China’s financial statecraft capability, but precisely because the funds are “leveraged” in nature, China’s financial statecraft comes with inherent risk, both financially and politically.


Zongyuan (Zoe) Liu (刘宗媛) is a Ph.D Candidate and Edwin Reischauer fellow at School of Advanced International Studies (SAIS), Johns Hopkins University. Her main line of research is in the intersection between International Political Economy and Comparative Politics with area expertise in East Asia. She specializes in the political economy of government-owned investment funds. In the context of China and the world, her research focuses on China’s state-owned investment funds with the intent to evaluate the domestic-international interactions that underpinned China’s practice of financial statecraft. Her current book project examines when, why, and how China leveraged its foreign exchange reserves to capitalize several sovereign wealth funds for the purpose of advancing a state-prioritized agenda in global financial markets. From a comparative perspective, she also examines why and how Japan leveraged its foreign exchange reserves and discreetly transformed Japan’s government-owned financial institutions. Beyond her research on government-owned investment funds, Zoe has done intensive research on Persian Gulf-East Asia relations with a special focus on energy, finance, and infrastructure.