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Many Happy Returns Activist investors may face some Chinese competition. In March, China made an announcement mostly unnoticed outside the business pages: it would make a major change in the way that it invests its vast foreign-currency reserves, which total over $1 trillion. China has piled up its cash mountain thanks to its record trade surpluses, generated largely through exports to the U.S. and other Western countries. It hasn’t put this cash into stocks, corporate bonds, or big private investments; instead, it has gobbled up American government debt. This debt purchasing has helped keep U.S. interest rates low. But China doesn’t get a very high return on those AAA-quality bonds—likely only half, or less, of what it could make in riskier investments. So to boost returns, it is launching an investment arm to diversify its holdings, with the goal of using its investment clout to “increase the efficiency of management and the investors’ returns,” says finance minister Jin Renqing. China hasn’t said how much of its money it will let the new agency play with, but if it’s, say, 20 percent, the fund would start life with over $200 billion on hand. From day one, such an agency would rival the world’s biggest pension funds. New York, for example, invests $140 billion of taxpayer money to fund retirement benefits for many of the state’s public employees, while California’s biggest pension fund oversees $233 billion. Despite Jin’s statement, China likely will instruct the agency to invest money in companies or nations that produce the raw materials that the country needs to sustain its rapid domestic growth—Middle Eastern and African oil projects and South American mining, for example. China’s increased investing muscle in such areas has troubling geopolitical implications: if it puts money into a Sudanese petrochemical project, for instance, it decreases the leverage of other nations and international companies, which might use withheld investments to press Sudan to improve its abysmal human rights record. But China’s new investment arm could also pour money into publicly traded, American-headquartered companies such as ExxonMobil and Wal-Mart. That’s where things could get really interesting. Activist public-sector pension funds in America and their private-sector union allies often use their leverage as big investors to get corporate management and boards to protect union jobs—as California’s fund, Calpers, did with the Safeway supermarket chain a couple of years back—or to take certain political stands, such as advocating for carbon-emissions caps. These funds’ trustees, usually political or union officials, justify exerting such pressure by citing the idea of “shareholder democracy.” Shareholders are just like voters, they say, and should play a big role in shaping the decisions that companies make. But as UCLA prof Stephen Bainbridge has noted, companies aren’t supposed to be democratic. Managers can’t perform well if they must please competing coalitions on their boards; they need to execute a single cohesive long-term strategy. That’s why every company board member is supposed to represent all shareholders, and not, say, particular labor or environmental interests. Until now, activist pension funds have happily advocated “shareholder democracy” because they’ve had the most votes. (Unlike these funds, most big private investors don’t use their stakes in firms to agitate for goals beyond competitive investment returns.) But what if China, a huge institutional investor, amasses large stakes in publicly traded companies? Public-sector pension funds could lobby manufacturers like the Big Three automakers, Boeing, and John Deere to keep good union jobs here. But China, as a shareholder with an eye toward higher-quality jobs at home, could take the opposite position, encouraging the creation of more jobs on its own soil—in the name of “increasing the efficiency of management and the investors’ returns,” of course.
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