Getting the most out of foreign exchange reserves
Cao Huining and Liu Jin
Thursday, September 27, 2007
IT HAS been reported that China Investment Co, the long-awaited State forex investment company that is expected to make better use of the country's huge foreign exchange reserves, will be inaugurated tomorrow.
After three decades of robust and continuous economic growth, the country has accumulated US$1.3 trillion of foreign exchange reserves. This is about half of China's annual gross domestic product (GDP), which means every two percentage points of revenue from the foreign exchange reserves equals one percentage point of growth in GDP.
Information about the reserve's investment portfolio is not available to the public, though research indicates a big proportion of its funds are in the global bond market, especially in US bonds. Before 2004, the reserve's assets were primarily invested in US treasury and mortgage bonds. Corporate bonds gained more attention after 2004.
Compared with other financial assets, especially shares, bonds are less risky — and less rewarding. Putting the country's forex reserves into the bond market was fine when the reserves were small. The wisdom of this stance becomes questionable once the forex reserves exceed the amount needed for trade settlements.
Past experience proves that a stock-centred investment portfolio is much more rewarding than a bond-centred one. In the last century, the annual difference in returns between the two portfolios was between five and eight per cent in the US and around three per cent in Europe and Japan.
Given the gigantic size of China's forex reserves, the country could expect to see its returns increase by the equivalent of about 1.5 per cent of GDP if the investment portfolio became more stock-centred.
Switching the portfolio's focus would be worth a try despite the higher risks involved with stock investments. The newly established forex investment firm is obviously a pilot step in this direction.
During the transitional period, the key issue will be what kind of financial assets are worth investing in.
All non-bond financial assets fall into categories of shares of listed companies and equities of private firms. The stock of listed companies is more liquid and transparent, so it is relatively more expensive. The equities of private firms are less costly, less liquid and less transparent, but more rewarding in the long run.
An institutional investor will generally include both of them in its portfolio, with different proportions of each. So which one should the investors of China's forex funds favour — shares on the stock exchange or the equities of private firms? In other words, the investors will have to choose between acting like a mutual fund manager and a venture capital runner hunting for private equity.
Judging from several recent developments, the authorities seem to prefer private equities. This is understandable because China is a green hand when it comes to investing funds from the foreign exchange reserves. Moreover, there is a successful example to learn from: Temasek Holdings in Singapore.
Set up in 1974, Temasek Holdings oversees the investments of the Singapore government. Its average annual rate of return in the last three decades has been 18 per cent, much higher than the annual growth of the stock market. By the end of last year, the company was managing $100 billion worth of assets, about 83 per cent of Singapore's GDP for the year.
Temasek Holdings operates like a venture capital firm. It makes its investment decisions only after extensive research. As of last month, Temasek Holdings was the majority shareholder in more than 20 companies in the banking and telecommunications sectors, among others, in countries in East Asia and Southeast Asia.
However, while Temasek Holdings' successes are remarkable, its experiences are not suitable for China to copy at this moment.
As is typical for venture capitalists, Temasek Holdings' huge rewards came after facing big risks.
Temasek Holdings succeeded in most of its investment projects because of its unique access to information. About 40 per cent of its investments were made within Singapore, and the rest were mostly in neighbouring countries. It is not hard for Temasek Holdings to acquire the information it needs to make investment decisions.
Singapore's economy has been closely integrated into the global economy ever since the country was founded. The people at Temasek have been able to draw on their country's rich trade experiences.
When China uses funds from its forex reserves to invest, it will have to venture out into global financial markets. However, the Chinese are far from experienced in the global market.
It is important to maintain a certain level of liquidity in the forex reserves. If the funds are put into private firms, it will be hard to convert them back to cash when needed without suffering big losses. So it is improper for the forex investment body to copy Temasek Holdings.
Therefore, the stock of listed companies is a better choice for China as it goes in search of bigger rewards by investing funds from its foreign exchange reserves.
To manage the risks involved in trading on the stock market, the forex investment body could choose a global stock market index mutual fund as their primary investment target.
An index fund would be a good target for the forex investment body because investing in them does not require experience, talent or access to information to make an investment decision.
By tracking a package of shares, such funds dilute the risks as much as possible. And index funds are also the most liquid and least costly of all mutual funds, raising the long-term returns of the forex investment.
Simply put, targeting index funds is the best strategy for China at this moment, as it faces the many possible ways to construct its investment portfolio.
Cao Huining is a professor with the Cheung Kong Graduate School of Business, and Liu Jin is a professor with the University of California
China Daily/ANN
Thursday, September 27, 2007
Thursday, September 20, 2007
Economic Growth Not Fast Enough, Say VC
Economic Growth Not Fast Enough, Say VC
By Shareen Han
Bandar Seri Begawan - Brunei's economy is not expanding fast enough to provide sufficient jobs for university graduates, said Universiti Brunei Darussalam's vice-chancellor.
It is a demand and supply problem, and some graduates are not willing to work in the private sector because they know that there are more benefits in the public sector, Dato Paduka Dr Hj Ismail Hj Duraman told The Brunei Times in a telephone interview yesterday.
"In the minds of locals, the private sector cannot compete with the public sector because it has more benefits compared to other countries that have a tax system," he said.
He said most locals need to "tackle their attitude first", in order to make the implementation of national policies more effective in the long term.
"It is a paradox that locals are not taking up the jobs, but foreign workers are taking it instead," he said.
One of the reasons why employers hire foreign workers is because they are cheaper and locals are too selective in choosing jobs which are mostly filled up by foreign labour, he said.
Moreover, some of the unemployed locals may come from well-to-do families, so they would rather enjoy life with their families, he said.
"There is no simple solution, a concerted effort by everyone is needed," he said, adding that graduates should be more proactive and take up any available job opportunities, including apprenticeship programmes.
"The attitude will only change when a crisis arises, because there is no shocking factor at the moment that they need to make a drastic change as the oil and gas is still there," he added.
The vice-chancellor said that one of UBD's roles is to equip students with the knowledge and skills, but employers are always looking for "something extra" in workplaces.
"Thus, I made the speech (at the 19th convocation ceremony) to graduates that they need to bring added value to the organisation that they work for," he said.
Dato Ismail also noted that UBD is currently doing research on unemployment in Brunei because the statistics that are currently available may not be accurate and regularly updated. There are 313 local jobseekers that fall under the technical, vocational and university graduates category, based on figures from the Labour Department for the month of June.-- Courtesy of The Brunei Times
By Shareen Han
Bandar Seri Begawan - Brunei's economy is not expanding fast enough to provide sufficient jobs for university graduates, said Universiti Brunei Darussalam's vice-chancellor.
It is a demand and supply problem, and some graduates are not willing to work in the private sector because they know that there are more benefits in the public sector, Dato Paduka Dr Hj Ismail Hj Duraman told The Brunei Times in a telephone interview yesterday.
"In the minds of locals, the private sector cannot compete with the public sector because it has more benefits compared to other countries that have a tax system," he said.
He said most locals need to "tackle their attitude first", in order to make the implementation of national policies more effective in the long term.
"It is a paradox that locals are not taking up the jobs, but foreign workers are taking it instead," he said.
One of the reasons why employers hire foreign workers is because they are cheaper and locals are too selective in choosing jobs which are mostly filled up by foreign labour, he said.
Moreover, some of the unemployed locals may come from well-to-do families, so they would rather enjoy life with their families, he said.
"There is no simple solution, a concerted effort by everyone is needed," he said, adding that graduates should be more proactive and take up any available job opportunities, including apprenticeship programmes.
"The attitude will only change when a crisis arises, because there is no shocking factor at the moment that they need to make a drastic change as the oil and gas is still there," he added.
The vice-chancellor said that one of UBD's roles is to equip students with the knowledge and skills, but employers are always looking for "something extra" in workplaces.
"Thus, I made the speech (at the 19th convocation ceremony) to graduates that they need to bring added value to the organisation that they work for," he said.
Dato Ismail also noted that UBD is currently doing research on unemployment in Brunei because the statistics that are currently available may not be accurate and regularly updated. There are 313 local jobseekers that fall under the technical, vocational and university graduates category, based on figures from the Labour Department for the month of June.-- Courtesy of The Brunei Times
Subscribe to:
Posts (Atom)