China should bet­ter wealth man­age­ment

In some coun­tries, such as the United Arab Emi­rates, the value of such as­sets is much larger than that of their nom­i­nal for­eign re­serves.

The Pak Banker - - Editorial - Zhang Monan

The global fi­nan­cial cri­sis has of­fered China a good op­por­tu­nity to re­view its abil­ity to man­age its in­creas­ing na­tional wealth.

Dur­ing the past three decades China has de­vel­oped into the world's largest for­eign re­serves holder and net cap­i­tal ex­porter from a coun­try that lacked re­serves and for­eign in­vest­ment. The coun­try has changed from be­ing a debtor to be­come the world's sec­ond largest cred­i­tor.

This has had a pro­found in­flu­ence on China's par­tic­i­pa­tion in glob­al­iza­tion, but it has also brought into stark re­lief the coun­try's cur­rent dilemma.

China's for­eign re­serve sys­tem has added huge pres­sure to its is­suance of money. The coun­try ur­gently needs to change its longestab­lished for­eign re­serves man­age­ment model and work out a long-term strat­egy for na­tional wealth man­age­ment.

By the end of 2009, China's for­eign re­serves had in­creased to $2.4 tril­lion, nearly 30 per­cent of the $8.1 tril­lion world to­tal. In com­par­i­son, Rus­sia holds nearly 7 per­cent of global for­eign re­serves and other emerg­ing economies, such as In­dia and the Re­pub­lic of Korea each pos­sess nearly 4 per­cent of the world's to­tal. At present, emerg­ing economies hold more than 50 per­cent of world's to­tal global for­eign re­serves.

Com­pared with the cred­i­tor sta­tus of many emerg­ing economies, al­most all de­vel­oped coun­tries have be­come debtors in re­cent years. By the end of 2009, the to­tal global for­eign debt amounted to $56.9 tril­lion, of which the United States, Ja­pan, the United King­dom, Ger­many, France, and other Euro­pean coun­tries owed the lion's share. The US's for­eign debt was 23 per­cent of the global to­tal. Such an un­bal­anced global cred­i­tor-debtor struc­ture be­tween emerg­ing and de­vel­oped economies has been largely the re­sult of the West­dom­i­nated fi­nan­cial and in­dus­trial di­vi­sion of la­bor.

Al­most all kinds of global fi­nan­cial prod­ucts are is­sued by the US and de­nom­i­nated by the dol­lar. The pur­chases of large vol­umes of US bonds by emerg­ing economies as part of their of­fi­cial for­eign re­serves have con­trib­uted a great deal to the US' fis­cal deficit and its debts fi­nanc­ing.

With their net for­eign credit rapidly ex­pand­ing, emerg­ing economies should find more ef­fec­tive in­vest­ment out­lets for their enor­mous for­eign re­serves so as to im­prove their earn­ings.

The es­tab­lish­ment of sov­er­eign wealth funds has be­come an im­por­tant plat­form and strate­gic op­tion for many coun­tries to man­age their for­eign re­serves as­sets.

Ac­cord­ing to the US Sov­er­eign Wealth Fund In­sti­tute, the value of the world­wide as­sets in sov­er­eign wealth funds to­taled $3.84 tril­lion by the end of March, 47 per­cent of the to­tal global for­eign re­serves. In some coun­tries, such as the United Arab Emi­rates, the value of such as­sets is much larger than that of their nom­i­nal for­eign re­serves.

The fast ex­pan­sion of sov­er­eign wealth funds com­plies with the strat­egy of coun­tries seek­ing to di­ver­sify their for­eign as­sets.

On av­er­age, global sov­er­eign wealth funds com­prise 25 per­cent bond as­sets and 45 per­cent stock as­sets. In Singapore, for in­stance, the stock in­vest­ment un­der the govern­ment in­vest­ment cor­po­ra­tions rep­re­sent about 40 per­cent of the coun­try's for­eign as­sets. In Nor­way, such in­vest­ments com­prise 60 per­cent of for­eign as­sets.

Ac­cord­ing to a Mor­gan Stan­ley es­ti­mate, the value of global sov­er­eign wealth funds has in­creased $45 bil­lion to $500 bil­lion year-on-year. By 2014, the value is ex­pected to sur­pass the scale of of­fi­cial global for­eign re­serves.

China has made much slower steps in this re­gard, es­pe­cially in its stock in­vest­ments. Cur­rently, China has two main sov­er­eign wealth funds: one with as­sets of $347.1 bil­lion, man­aged by the China In­vest­ment Cor­po­ra­tion, a wholly State-owned com­pany en­gag­ing in for­eign as­sets in­vest­ment, and the Na­tional So­cial Se­cu­rity Fund.

How­ever, China's sov­er­eign wealth funds have long at­tached ex­ces­sive im­por­tance to mo­bil­ity and se­cu­rity. For ex­am­ple, the China In­vest­ment Cor­po­ra­tion has in­vested 87.4 per­cent of its funds in cash as­sets and only 3.2 per­cent in stocks, in sharp con­trast to the global av­er­age of 25 per­cent bond in­vest­ments and 45 per­cent stock in­vest­ments.

As its for­eign as­sets con­tinue to in­crease, China should re­view its cred­i­tor sta­tus and pay more at­ten­tion to how to en­sure the steady growth of its hard-won sov­er­eign wealth. To this end, the coun­try should fur­ther ad­vance the in­ter­na­tion­al­iza­tion of the yuan and more ac­tively cul­ti­vate a home­grown fi­nan­cial mar­ket.

(The author is an eco­nom­ics re­searcher with the State In­for­ma­tion Cen­ter)

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