Maybe it’s because the U.S. has stayed relatively disentangled from this controversial subject. Or, even more likely, it’s because few people understand what SWFs actually are. Given that China possesses the world’s fourth largest SWF, it’s something worth discussing.

In short, a SWF is an investment vehicle created by the state. These funds are usually put together from windfalls of cash, often arising from the sale of natural resources. Predictably, oil-rich countries with small bureaucracies, like the UAE and Kuwait control two of the world’s largest such funds. Other funds are set up by are trade-heavy city-states, like Singapore.

Sovereign wealth funds differ from state-owned investment companies, like the Chinese behemoth CITIC 中国中信集团公司, in that they only invest state money (instead of attracting other investors) and focus purely on managing those funds, avoiding middle-man roles and the need for large armies of financial analysts. Also, to make sure they are profitable, states usually hire SWF managers with proven investment portfolios and give them a great deal of autonomy in their decision making (as opposed to government cronies, who will make the fund just another instrument of state power).

This of course, sounds like a capitalist utopia: the state investing tax dollars and multiplying their value, to support further state programs. In Alaska, one of the few U.S. states with a SWF, residents not only have the lightest tax burden of any state in the U.S., but also get annual tax rebates from the state. What could be better, then, than the state raising its own cash to support its citizenry, while also stimulating the economy with investments at the same time?

China’s sovereign wealth fund, the China Investment Corporation or CIC (中国投资有限责任公司), in this way, seems to be a cutting-edge commitment to capitalism. Drawing on China’s ridiculously large foreign exchange reserves, the CIC has brokered such high profile investments as a $3.3 billion stake in the U.S.-based Blackstone Group and even owns one-tenth of Morgan Stanley.

For the most part, CIC’s investments have met a warm reception in the West, which is always happy to see China further embrace the market economy. Critics do exist, however, and worry that China will use it’s increasing large stakes in major U.S. firms towards political goals, such as obtain sensitive technology or gaining greater influence over the American economy.

These fears, however, not only miss the real issue, but get it backwards: What is disconcerting is not China’s new influence over CIC’s investments, but CIC’s investments’ new influence over China. If a country has billions of dollars invested in an enterprise, after all, and becomes increasing dependent on funds raised by that invest to operate government programs, they’ll be willing to bend rules and take special actions to ensure the enterprise not only survives, but thrives. More alarming, the independence these enterprises possess means that they can craft (though in a limited way) China’s foreign policy and domestic politics without having ANY direct responsibility to the Chinese people. There are also obvious conflicts of interest that arise in the pursuit of justice–imagine what might have happened with Enrongate if a U.S. SWF (or one of it’s investment funds) had invested a billion dollars in the Houston energy firm. If you think that the Communist Party and centralized democracy disempower the Chinese citizenry in general, then this development towards “corporatocracy” should be really frightening.

And yet this is a debate that generally goes unaddressed, at least in any meaningful way. So, Dongcha asks: as political power in China is increasing focused put into the hands of smaller, more self-interested groups of people, shouldn’t the media in China and the West be raising alarms?

Chairman Mack says: “Political power grows out of the barrel of a fund.”

IT analysts in China said on Thursday that Beijing has probably severed the music selection function of the iTunes site. China is known for using technology to block Web pages that contain politically sensitive content.

While censorship in China is certainly a major issue, it seems that journalists (as invested in this issue as their jobs would naturally make them) usually get so riled up about the idea of a government controlling the flow of information that they miss the more significant issue here–China’s muscling in on IT companies.

The truth is that, even by China standards, the blockading of the entire itunes website is a bit of an extreme move to prevent sales of a little-heard-of compilation album sung in a language that most Chinese don’t understand well. Given the strong sentiments of patriotism and national pride present in China right now, wouldn’t it have been easier for China to just do what it has in the past–denounce the album as Western bias and let pro-China netizens satire it and the artists involved? Why draw more attention to the album than it would otherwise receive by making a big deal over it?

The would-be symbol of vacuous activism…

What’s probably going on her runs deeper than just the freedom of expression, the blockading of itunes over “Songs for Tibet” is just an excuse to strong-arm Apple, which is making inroads into the China market with its ipods and iphones, into playing ball with the government. The idea is that, by excluding Apple from one of the world’s fastest growing dot com economies, locally grown competitors will get a chance to establish themselves in the void, eating away at Apple’s potential market share. Apple, accordingly, is either forced to promise to play ball with the government’s way of doing things in the future or explain to shareholders why their sales aren’t rising as expected right now. It’s a trap that other supposedly righteous companies, like Google, have fallen prey to in the past–all eventually caving to Chinese demands.

The consequences of these companies caving to government pressure go beyond the mere evils of censorship. IT companies like Apple, Google, and Microsoft do far more than sell music or search the internet, they also establish vast virtual infrastructures that are increasing necessary to daily life and business–and that also are greedily eyed by the ill-intentioned. Take, for example, Yahoo’s ready willingness to give away the IP addresses of Chinese e-mail account holders to the government, which resulted in the arrest and imprisonment of three dissidents and journalists–cases which came to light because individuals were directly harmed by them. It’s easy to speculate that numerous other manipulations of these resources (which people expect to be private and protected), like espionage or simple corruption, go undetected.

So “Songs for Tibet” is about much more than Alanis Morissette trying to show she’s a good person by donating shlock recorded in her dressing room one night, this incident is about the very soul of American corporatism. Will Apple make a stand and fight this Chinese assertion of power and authority? Or will they, like Google, simply cave and cover it with lame excuses? Unfortunately, any decent bookie would heavily favor the latter choice, and make the betting interesting by taking wagers on just how long it will take for this eventuality to bear fruit. It would be nice, however, to see a corporation take a stand for once, and not just sell songs about doing so.

…and the will-be symbol of political oppression?

China is obviously changing–the Olympics are not only the country’s modern coming-of-age party but also an apparent landmark in a shift from industry and manufacturing to an economy based more on “affluent” economic sources such as services, entertainment, and investment. The sign that the government, which has long been reluctant (and even defiant, internationally speaking) to do anything that might curb it’s manufacturing dominance, would choose to do so for the Olympics is a sign of this shift.

This change of economy, of course, is necessary if China is to continue developing. But what are the greater consequences of Beijing’s choice to forcibly reign in industry for other goals? The businesses affected by the industrial curbs in the capital, most of which are happy to oblige out of national pride (and the rest of whom are smart enough to know not to make a fuss), may be less supine if it turns out that the effect of the Olympics isn’t just to change the world’s view of China, but also China’s view of itself.

As Dongcha has mused before, who isn’t to say that, seeing the Olympics bring cleaner air and less traffic to the city, these won’t become amenities that Beijingers ask for on an ongoing basis, not just when white dignitaries are in town? Even without grassroots action, it seems plausible that, since curbs on industry around Beijing are already in place, the government keep them indefinitely–using the Olympic momentum to push the city in a new economic direction? This would, after all, be an easy way to further develop China’s capital city into an international center.

Of course, this change would be positive for many, but not the manufacturers. Groups of people and businesses getting left behind and becoming obsolete is inevitable in any major economic shift, but seems somehow easier when that shift happens naturally, without the hand of the government pushing it on. In those cases, the (typically) slow pace of free market change gives more people more time to adapt to the new economy, and adjust their lives to get by in it. Also, it makes it harder for the people who lose on the change to find someone to blame. If Beijing, then, does what seems sensible and rides the Olympic economic and social inertia into a more modern economy, they also risk isolating a large segment of people that will see themselves as being betrayed for doing their patriotic duty–first they became manufacturers to make China great, then they curbed their businesses to show the world how great China had become, and at last they found that the government had moved on to other things, without them.

Can they see what the future holds?

First, the Uyghurs. Homemade explosives killed 11 in hotels, supermarkets and government offices in the town of Kuqa. A few days earlier 35-year-old Mehmet Dursun Uygurturkoglu set himself on fire in front of the Chinese Embassy in Turkey, as part of a protest.

It seems, from reading what little is available on the Uyghur movement, that their thinking is the same as that of the Tibetans–if you want the world to really notice and take action, the time is now (when all eyes are on China for the Olympics) or never. Unfortunately, it may be the case that a redress within China to their plight, combined with a lack attention outside China, is fostering extremist elements in the once-passive Uyghur autonomy movement. China certainly won’t forget these slaps in the face, either, so things are likely to only get worse from here in the short term.

Then, there’s basketball, touted here as being a particularly strong medium for fostering Sino-American relations. This theory got put to the test on Sunday, when America and China faced off in what was, by some estimates, the most watched basketball game in history. American players, according to reports, played a far more aggressive game than their counterparts and quickly widened the point gap after halftime before winning. Even Bush got up and left the stadium at halftime. So: it’s a mixed result. The huge attention the game received is certainly hopeful, though, and it should be kept in mind that cross cultural understanding is a process–rarely a result.

Next, China’s sovereign wealth fund. An anonymous poster over at the China Economics Forum had this interesting response to the post on CIC, the national sovereign wealth fund, on that blog:

I thought your analysis of the CIC was right to highlight the corporatists risks created by large sovereign investments domestically. But the CIC’s ability to invest domestically is limited, as it primarily is a vehicle for helping to sterilize China’s rapid reserve growth and thus it has to use the proceeds of its rmb bonds to invest abroad (its purchase of Huijin/ recapitalization of the CDB is a bit misleading … there are limits to what it can do here if it wants to help move funds out of China and thus slow reserve growth). Moreover, it isn’t — unlike Alaska’s fund — financed out of a fiscal surplus but rather is financed by borrowing, and borrowing in rmb to buy $ produces losses, not gains in most scenarios. as a result, it isn’t a vehicle for creating wealth. And as it was created to manage the fx that China’s government is accumulating as a result of a policy of resisting market pressure for currency adjustment, in my view it represents a move away from capitalism, not a move toward it — China’s state is accumulating large funds and investing them (in ways that may or may not reflect state goals other than limiting china’s financial losses), reinforcing state power in the global economy as a byproduct of a government policy to limit the adjustment in a key market price.

We’re not entirely convinced of the argument, yet, but thought that its merits attention.

And, last–for those disappointed not to be hearing more about Beijing’s smog–it would appear that the reason is because it has lifted somewhat. Recently thunderstorms have knocked much of the pollution out of the air, giving relatively clear skies. Hopefully, it won’t be the last breath of fresh air the 2008 Olympics brings into China.