January 09,2008

Chinese SWF: We Behave Better Than Hedge Funds

By CSC staff
For these countries with SWFs, the sub-prime crisis is bad news since it brings about economic uncertainties and causes the depreciation of their dollar-denominated assets. On the other hand it also creates opportunities for them to shop cheaply on Wall Street.
 
With the holiday season over now, those countries who, acting like Santa Claus, used their sovereign wealth funds (SWF) to extend the lifeline of hard hit banks and other financial institutions on Wall Street need to rethink their image if they intend to buy more.
 
During the past two years, SWFs together with some Chinese financial institutions made total investments of at least $77.2 billion in western banks and wealth management companies. Among those investments, $66.6 billion were made in the last quarter of 2007, because of urgent capital needs of banks after the sub-prime crisis and the relevant credit crunch.
 
Large transactions includes Government of Singapore Investment Corp’s (GSIC) USD 9.7 billion investment in shares of UBS, Temasek Holdings?USD 9.2 billion purchase of an 18% stake in Standard Chartered, an investment of 7.5 billion by Abu Dhabi Investment Authority (ADIA) to purchase 4.9% of total stake of Citigroup, an 4.4 billion investment by Temasek in the equity of Merill Lynch (the company still reserves the right for further purchase of Merill Lynch’s shares) and China Investment Corporation’s (CIC) 5 billion investment in the stocks of Morgan Stanley.
 
Faced with USD depreciation and continuously depreciating USD assets after sub-prime crisis, China is looking for more acquisitions using its sovereign wealth fund. But before they take any action, CIC will need to address certain issues.
 
China has always lacked confidence in their investments on the international market. Reportedly, CIC is now looking to form an advisory council in order to formulate their long-term international investment strategy. Also, CIC currently lacks talents with international financial experiences and is therefore recruiting fund managers for it’s global assets allocation.
 
The most eminent task of China is to eliminate concerns by the international market about its SWF. At the moment, the country is actively participating with the international community in discussing the formulation of SWFs?management rules, striving for more  say on the issue and in turn beneficial results.
 
Wei Benhua, Deputy Administrator of State Administration of Foreign Exchange (SAFE), claimed that SWFs would help coordinate the relationship between global savings and investments, and improve the condition of resource allocation. He also emphasized the principle of long-term investment, and that investing in the real-entity economy would benefit more of the population in more countries.
 
In particular, he pointed out that sovereign wealth funds were different from hedge funds, "SWFs rarely make investment with leverage, and thus will not cause the imbalance of international financial system." The implicit meaning is that, if the market doesn't worry about hedge funds with high risks and low transparency, why should they bother worrying about SWFs?
 
Apart from the USD 20 billion in CIC, SAFE manages USD 1.3 trillion of foreign exchange reserves. With the increasing scale of reserves and the expectation of continuous dollar depreciation, the Chinese government is worried about maintaining the value of its sovereign wealth. At the moment, it’s rumored that the government will increase the scale of CIC.
 
The Chinese government has to make western countries believe that SWFs are just the same as private funds -- professional investment institutions operating within the market mechanism, complying with present rules of the international financial market ?and should therefore receive the same treatment as other institutional investors. Wei Benhua further explained, "SWFs should not receive discriminating treatment. SWFs of developed countries and developing countries should receive equal treatments, operating and competing under the same platform and same conditions. Only under the principle of fairness and mutual-benefit, the market should be opened, thus giving each other equal market entering opportunities in order to realize win-win situation." according to his article published in China Business News, a leading financial newspaper headquartered in Shanghai.
 
On the one hand, he emphasized that, to stabilize financial markets, SWFs should improve their information transparency. But he then added that gradualism is needed for CIC to be transparent. "For some newly-formed SWF, information revelation is restrained by market conditions, as some information could lead to market fluctuation, negatively impacting on the market."
 
Wei Benhua expressed, "the newly-formed CIC, since its birth, has attracted lots of attention from the international community, a few nations, on purpose, disseminate the argument of China’s investment threat. The international community should clearly oppose different forms of investment protectionism and financial protectionism."

 

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