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The two most
visible - and oldest - sovereign wealth funds are in Singapore,
the Government Investment Corporation and Temasek, which have
combined assets of US$200 billion and have long faced questions
over lackluster investments.
The latest was Temasek's
US$6.2 billion purchase of 9.4 percent of the US investment bank
Merrill Lynch on January 3, only to have Merrill announce on
January 11 that it was taking a US$15 billion writedown because
of the subprime crisis.
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Asia
ponders its astounding foreign exchange reserves
John
Berthelsen
Asia Sentinel
18 Jan
08
http://www.asiasentinel.com/index.php?option=com_content&task=view&id=985&Itemid=3
The
greatest shift of capital in world history, now washing across
Asia, poses a dilemma for policymakers
What is Asia
going to do with its money? Because of the astonishing profligacy
of the western economies, primarily the United States, the
region's 11 biggest economies have amassed the biggest transfer
of financial resources in the history of the world. Although most
of the focus has been on China, with its US$1.5 trillion in
reserves, the region as a whole holds more than double that
amount, nearly US$3.9 trillion. And, by one estimate, the figure
appears set to soar upward even further, to US$5.1 trillion by
the end of 2009.
It is questionable how long this can go
on at the present pace, however. Ultimately it would probably
collapse the global monetary system. Debt of that magnitude is
not repayable and thus the trust basis of the reserve system
would simply collapse. Nonetheless, the way the region manages
this massive amount of money can be expected to dominate global
economics and financial markets for decades to come. But with few
really sophisticated financial markets, and lots of barriers
remaining to regional flows of capital, how will this be handled?
For perhaps the last two to three decades, the global
trade system has functioned as a kind of perpetual motion machine
in which the United States in particular exported a vast amount
of its industrial plant to Asia in search of cheap labor. Asia's
mercantilist economies, primarily Japan and China, made cheap
goods and sent them to the west, driving trade balances deep into
negative territory. The profits from those goods were then
recycled back into US stock markets, treasury and corporate
bonds, money market funds and other financial instruments used to
keep the west, particularly the US economy, going.
But
perpetual motion machines work for only so long. Successive US
governments, fearing rejection at the ballot box, did nothing to
stimulate domestic savings to prompt domestic investment or to
cut consumption. Even in areas where the US had a real advantage,
including information technology, biotechnology and aerospace,
the country began to lose its lead. Services, which it long
dominated, also began to slip into the red. The US has thus
become Asia's biggest debtor by far, its international deficit in
goods and services now having reached US$63.1 billion for the
month of November alone, the biggest total in 14 months.
This
wasn't supposed to happen. The falling dollar and slowing US
economy were supposed to begin to reverse that trade balance. But
it doesn't appear to be working yet. Asia's central bankers and
policymakers are beginning have major concerns about the capital
inflows, especially to financial markets, pressuring currencies
to rise and creating the conditions for inflation.
"The
resulting huge accumulation of foreign exchange reserves leaves
these economies far better able to deal with potential financial
shocks than in 1997," according to the Asian Development
Bank in its July, 2007 Asian Economic Monitor. But, the ADB says,
"Surging capital inflows… impose a significant
challenge to the region, as inflationary pressures build and
world interest rates continue to rise. Given that financial
market stability is critical to macroeconomic management, capital
flows have become a significant factor affecting policy decisions
in these emerging East Asian economies. Policy options are
limited because of the increasing conflicts between domestic and
external objectives."
Beyond China, India is perhaps
the best example. Although not as big as those of China or Japan,
India's foreign exchange reserves soared from US$192 billion in
2006 to US$284 billion in 2007 – a 47.9 percent jump in a
single year. But even tiny Brunei, with a population of about
380,000, holds between US$40 billion and US$60 billion (the exact
amount is a state secret). Singapore, with only 4.5 million
citizens, holds US$261 billion. Hong Kong, with 7.5 million,
holds US$149 billion.
The holders of these reserves,
denominated in US dollars, are obviously hostage to their
debtors. China alone holds US$1.499 trillion in reserves.
According to Qu Hongbin, HSBC's chief economist for China,
"China's position is just too long in the dollar. If they
are going to make any significant reallocation or shift, it would
be almost suicidal. Once the market smells that China would sell
down dollars, the dollar would go into free fall."
Although
the latest data indicate that China's trade surplus growth may
have peaked, with import growth exceeding export growth over the
final three months of 2007, the country has vast resources that
Beijing is delicately seeking to manage in a way that would
preserve their dollar value. But, Qu says, "It's just like a
bank. If you lend too much money, the last thing you want to see
is this guy go bankrupt. When poor Asia lends too much money to
rich America, it becomes a hostage."
In 2006, gross
capital inflows into Asia reached a record US$269 billion,
spurring the ADB's concern. But in 2007, that amount soared to
US$740 billion, increasing the pressure to drive up asset prices
and putting pressure on exchange rates. It has driven the
spectacular growth of sovereign wealth funds funds controlled by
governments to buy and manage foreign assets. So far few
sovereign funds have covered themselves with much glory. The
US$200 billion China Investment Corporation bought US$3 billion
worth of the investment company Blackstone only to see its shares
collapse by US$600 million. A similar US$5 billion investment in
the troubled investment bank Morgan Stanley came just as the
extent of the subprime crisis was starting to hit financial
markets.
Nonetheless, today, according to a study by
Joshua Aizenman for the Federal Reserve Bank of San Francisco,
sovereign wealth funds hold assets ranging from US$1.5 to US$2.5
trillion, an amount that is expected go grow seven-fold over the
next decade. This is "an amount larger than the current
global stock of foreign reserves of about $5 trillion."
Sovereign wealth funds, Aizenman writes, "'have stirred
debate about the extent to which their size may allow them to
destabilize financial markets and their policies may be driven by
political, rather than economic and financial,
considerations."
The two most visible - and oldest -
sovereign wealth funds are in Singapore, the Government
Investment Corporation and Temasek, which have combined assets of
US$200 billion and have long faced questions over lackluster
investments. The latest was Temasek's US$6.2 billion purchase of
9.4 percent of the US investment bank Merrill Lynch on January 3,
only to have Merrill announce on January 11 that it was taking a
US$15 billion writedown because of the subprime crisis. Another
is the Korea Investment Company, with US$20 billion in assets.
The bulk of sovereign fund assets, however, are held in the
petro-oligarchies of the Middle East, which have combined assets
of more than US$1 trillion between them.
Where is this
money going to be invested? Up to six months ago, western powers
were humiliating Asia's attempts to buy western assets –
see China's attempts to acquire Unocal and the white goods
manufacturer Maytag. Even attempts by Hong Kong tycoon Li
Ka-shing, to take over the infrastructure of the Panama Canal
were rebuffed on suspicion that he might be too close to the
communists in Beijing.
But today, given the growing
desperation of American investment banks in particular, the
sovereign wealth funds' money is considerably more appreciated –
just ask Merrill and Morgan Stanley.
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