Property without power?
Diplomatic sovereign wealth funds argue, more or less, that they have no desire for power – so there should be no restrictions on their ability to accumulate property. Those hoping for a cut of the SWF lucre – and those worried about creeping investment protectionism – tend to agree.
Others argue that those who accumulate large amounts of property usually end up with a measure of power. Felix Rohatyn in the New York Times on Tuesday:
“You don’t need to appoint two directors to a board to have influence when you own 10% of the company.”
Andrew Ross Sorkin goes further:
“Let’s be honest. The idea that foreign investors have no influence because they don’t have a seat at the board is laughable.”
Rohatyn (paraphrased by Sorkin) believes that the countries with sovereign funds “want influence on the world stage, despite their insistence otherwise.” He says “there has to be a political objective, above the rate of return.” Otherwise, per Sorkin, it makes little sense for “people with little history investing in such large assets” to make “big ticket … investments … in a matter of weeks” when they have “virtually no way to value them.”
Michael Klein of Citi also doesn’t mince words. He though doesn’t share Rohatyn’s concerns. Hasty, big ticket investments from sovereign wealth funds have helped to stabilize the global financial system:
""The greatest single benefit to the longevity of the U.S. financial structure and the U.K. financial structure is the investments recently made by foreign wealth funds into the banking system."
Sovereign funds clearly have helped out the existing management of troubled banks and broker-dealers. In return they no doubt hope for Alwaleed-like returns.
But, like Rohatyn, I suspect that their home countries also hope to get (political) credit for riding to the rescue of the US financial system as a time when the US financial system needs capital to weather what may be a sharp downturn.The US, in some sense, outsourced the maintenance of US financial stability to the wealth funds of other governments.
It is hard to see how the ability to deploy large sums of money quickly doesn’t provide the institutions controlling that money some measure of power. The ability to inject funds into some institutions and turn others down is a form of power. The United States ability to shape who got financing from the IMF, and on what terms, certainly was a source of US power back in the 1990s.
There is another reason why sovereign funds might start to throw their weight around a bit more: self-preservation. If Morgan Stanley starts to go south, threatening the loss of China’s money, could the CIC really afford to stand by and do nothing?
Peter Thal Larsen of the FT thinks not:
"Don’t expect them [sovereign funds] to keep quiet indefinitely if their investment underperforms."
Conversely, should a US bank with a major sovereign investor go bust, could the US government really stand by and do nothing? Former Treasury Secretary Summers, in the FT:
“It is one thing to invest in a passive index but what is going to happen if a bank which has sold preferred stock to a foreign government gets into trouble?”
Summers’ answer — as related by Slate’s Daniel Gross — is that the banks fate necessarily will then be decided by finance ministers and foreign ministers.
To my mind, the argument that sovereign wealth funds are can be "financial players" not "political players" — and the idea that sovereign funds can accumulate property without accumulating power — has four limits:
1. No commercial financial firm is set up to earn negative real returns. Some sovereign wealth funds, by contrast, are very likely to produce negative real returns, largely because their primary mission it to help stabilize the exchange rate.
The China Investment Corporation is the most obvious example. Borrowing in RMB at 4.5% to buy dollars that are expected to depreciate (at least right now) by 8-9% a year at a time when risk-free US assets yield 3.5% is a very good way to lose money. Taking additional risks to get better returns carries with it the risk of producing even bigger losses (see Blackstone).
The CIC is borrowing in RMB and investing in dollars and euros not because that makes good commercial sense, but because its overarching objective is to support China’s currency policy. The CIC exists, above all, to support a policy that China’s leaders believe is necessary to preserve jobs in China’s export sector, or perhaps to preserve profits in China’s export sector (the great irony of this policy is that about the only thing that hasn’t grown impressively during China’s recent boom is employment). The logic that led to its need to take on currency risk also suggests it won’t be investing in firms that compete with Chinese products and Chinese firms.
China’s sovereign wealth fund’s primary mission is to help China avoid more rapid currency adjustment. It consequently contributes to the world’s imbalances rather than helping to reduce them. That no doubt shapes my view of China’s fund; by channeling Chinese funds abroad (at a loss) rather than investing them at home it helps to sustain the world’s imbalances.
2. Centralizing financial management in the hands of the state almost invariably increases the power of the state.
Compare a world where the oil windfall is distributed broadly among all the residents of an oil-exporting country (by, for example, paying dividend payments) to a world where the oil windfall is saved centrally. The world where the windfall is saved centrally clearly enhances the power of the state in question. Those running the government, rather than the country’s residents, will have a lot of lucre to spread around.* And those benefiting from its lucre aren’t going to want much to change.
Countries that rely on oil revenue – a very volatile revenue stream – do need some kind of fiscal buffer. Budgeting for $60 a barrel oil is far less of a risk if you have a bit of spare cash around. But those oil-exporting economies now adding to their assets most rapidly are generally those that already have plenty of spare cash. They have the capacity to consider more innovative strategies for decentralizing the management of oil wealth. Maintaining the oil fund under the central management of the state tends to increase the state’s power, both at home and abroad.
The lack of transparency of the big funds in the Gulf is also a political choice. It gives those running the funds more flexibility. It also gives those running the funds the capacity to invest in ways that their populations might not support.
*Norway is a special case. Its was already rich before oil and its oil is likely to run out far more quickly than the Gulf’s oil, so there is a stronger case for spreading the oil windfall across several generations. The decision to save rather than spend was democratically decided, and the broad portfolio choices of its fund have been democratically ratified.
3. The line between commercial and political investment is never completely clear.
The CIC’s investment in China Railways (a Chinese SOE) has done better than its investment Blackstone. Central Huijin’s (now part of the CIC) investment in China’s state banks will likely generate larger returns than the CIC’s investment in Morgan Stanley. China expects to get political credit for its commercial aircraft purchases. It is fairly widely thought among the Beijing Press corps that China was disappointed that it didn’t get more political credit for its investment in Blackstone.
4. Sovereign commercial decisions with negative economic consequences will almost inevitably be considered political.
Suppose the CIC’s investment in emerging equities add to pressure on other emerging Asian currencies – causing problems for other Asian central banks. Suppose their government sends an emissary to China asking China to invest less. Suppose China says, sorry, the CIC is making a purely commercial decision – and we don’t interfere in commercial decisions. Would China’s neighbors be pleased?
Suppose the CIC decides, on commercial grounds, to sell dollars and buy euros, adding to the pressures on both the US and Europe. Would Europe believe that such a decision is simply commercial? Remember, Europe supposedly asked China not to add to its euro holdings a while back.
Suppose the CIC gets worried about its exposure to the US financial sector, and were to decide its financial interests would be best served if took large short positions against several large US banks?
We already know that Iceland didn’t look kindly on Norway’s decision to short its banks. The Economist:
IN REYKJAVIK almost two years ago the Norwegians were throwing their weight around and the locals were furious … a government-owned fund from Oslo … had found an easy way to make money in a market it knew well. It began to sell short the bonds of Iceland’s over-stretched banks. Only common sense, you might argue.
Halldor Asgrimsson, then Iceland’s prime minister, did not see things quite like that. Why was the Norwegian state investing hundreds of millions of dollars to undermine Iceland’s economy? … “We must protest against this action,” he told Morgunbladid, a newspaper.
Asia didn’t exactly look kindly on American resistance to reining in American hedge funds that were shorting their markets back in 1997 and 1998 – even though it was quite clear that these hedge funds weren’t investing US government money. And, as Summers notes at Davos (do read the entire piece), it is hard to think that any country would view another country’s sovereign fund taking a commercial decision to short its currency favorably.
To sum up, I don’t quite see how an aggressive sovereign wealth fund can avoid politics.
Large sovereign funds will end up having an impact on market in other countries – positive and negative. Sovereign funds are accountable — in some cases literally — to a sovereign, not to shareholders. Complaints about their actions will be directed to the sovereign too.
There are ways to minimize the associated risks while still giving sovereign investors exposure to equities: using intermediaries, buying index funds and the like. But they require that sovereign investors accept some limits on their sovereignty now to avoid the risk of problems later. I don’t yet see much evidence that those with large fund are open to such limits either.
Today we have a global economy, with large global flows of funds across borders.
Much of that flow currently is organized by governments, often governments seeking to resist market pressures for adjustment.
But there is no global consensus on the right role of the government in the economy. So long as governments investing abroad generally limited themselves to bonds, the absence of such a consensus didn’t matter much. Now that governments want to invest in equities, though, a host of issues are a lot harder to avoid.
Nouriel thinks sovereign funds are a passing phase; I am not so sure. So long as governments are resisting more rapid balance of payments adjustment, they will have a lot of funds to invest. Overall sovereign asset accumulation is still trending up — both in the oil-exporting world and in oil-importing Asia.
UPDATE: I didn’t exactly find Ken Rogoff’s comment at the end of his interview with Katrin Bennhold that the Gulf sovereign funds think that they are doing the US a favor by investing in US banks reassuring. Favors are expected to be returned. And I am fully convinced that the leverage works only one way — true, the US needs inflows to sustain a large deficit, but large surplus countries also need places to invest, and there aren’t all that many big enough to absorb the kind of flows now being discussed. The euro and pound can only be pushed up so far …
Its just depressing to think about. The US needs to figure out how to pay its own bills. Something it cant do.
1. No commercial financial firm is set up to earn negative real returns.
Most commercial firms are set up to earn negative real returns in the short run for positive real returns in the long run. This appears to be the case with CIC. Whatever loses CIC makes in the next year, it should be vastly outweighed by the positive returns over the next thirty.
2. Centralizing financial management in the hands of the state almost invariably increases the power of the state.
“The state” is not a monolithic entity. Having financial management split up among different parts of a government can keep things from becoming unbalanced.
3. The line between commercial and political investment is never completely clear.
It’s not an either/or. If an investment has *both* a commercial *and* a political rationale then I see no reason to find it objectionable. The overriding requirement for CIC is that it not be a drain on state finances. However, there are many ways of making money, and if the tiebreaker between two profitable ventures is political, I don’t see anything wrong with this.
Note that private companies also make decisions based on political factors if the profits also look good.
4. Sovereign commercial decisions with negative economic consequences will almost inevitably be considered political.
Which puts pressure on the SWF’s not to make decisions with negative economic consequences. This is not a bad thing. In the end, what matters is that the people making the decisions be incentivized to make profitable decisions, and losing public support for making bad decisions is one way of doing thing.
bsetser: Diplomatic sovereign wealth funds argue, more or less, that they have no desire for power – so there should be no restrictions on their ability to accumulate property.
In fact, I don’t see any SWF arguing this. If the United States doesn’t want CIC investing in US companies, they can ban it, and CIC will take its money elsewhere. CIC really doesn’t care what the rules are.
The people that are screaming aren’t the SWF’s. They are the financial people that stand to make money from the SWF’s. If CIC or the Saudis don’t invest in the United States, it doesn’t hurt CIC or the Saudis. There are plenty of places in the world where their money is welcome.
It does hurt Wall Street and people in the US finance industry and politicians from areas with large financial institutions, and *they* are the people who are screaming the loudest about protectionism.
“Today we have a global economy…” and like it or not we will tomorrow. But we won’t have a global CB or currency. Rather we will have individual players seeking to maximize their power and sustain the unsustainable system that gave them their power, just as we have now. The longer a trend continues the longer it is apt to continue, and the more violent its eventual reversal. Pax Americana is floating towards the falls, but not to worry, our leaders will release more water and save us from the rapids (recession), so we can party on. Brad worries about the political power of SWFs. But there is something worse than being owned: no one wanting to own you.
bsetser: I don’t quite see how an aggressive sovereign wealth fund can avoid politics.
I don’t see how an aggressive private fund can avoid politics.
bsetser: But they require that sovereign investors accept some limits on their sovereignty now to avoid the risk of problems later. I don’t yet see much evidence that those with large fund are open to such limits either.
So far CIC has made investments in the United States with less than the 5% or 10% caps necessary to create reviews. Neither CIC or any other SWF that I know of has complained about these limits. The people that are complaining aren’t the SWF’s but rather people that plan to make money off of the SWF’s.
The issue with CIC is that it pretty much kills whatever is left of the neo-liberal agency. CIC doesn’t have any problems with US restrictions on Chinese investment in US banks, but it looks funny if the US then complains about restrictions on US investment in Chinese banks. (Which is also why Wall Street is screaming about this.)
2fish — I was thinking of more demanding restrictions. Funneling SWF money through a multilateral agency that does the investment. Limiting sovereigns to equity index funds. And so on. Basically, a tightening of the current regime.
Note as well that the US doesn’t rule out sovereign investments over 5% in a bank/ over 10% in other companies. It only makes such investments subject to a formal review. In practice, this has been a limit –
Here is a concept that the US hasnt figured out in a longtime. Sacrifice. If we dont want foreigners onwing everything maybe we should encourage less consumption! Reducing silly amounts of energy use would be a start. And all this crap from China. Im done with rich elite baby boomers which my parents are members.
SWFs are the only next best “counter measure” means for any country lacking a strong military power, resources, currency, etc to “thwart off” any major financial “hijack” shock to its economy caused by a George Soros-type hedge fund or government “ruthless stunt” initiated from a rich developed country such as the U.S. ever again.
Also, unlike the Gulf Oil rich countries, a more accurate term to be used for any socialist country should be “Peoples’ Wealth Fund (PWF).
On my own blog: how to actually restore the gold standard (or not).
It’s a stupid problem. What did the US expect when it flooded the world with deficit dollars? It didn’t discover that foreign governments were intervening yesterday. And now it won’t allow investment of those dollars? Why do the rules start now at the investment stage? Why was this ignored at the trade stage?
Is capital protectionism better than trade protectionism?
Why is US capital protectionism preferred to US trade protectionism as the effective response to China’s FX subsidization policy?
Whether the SWFs are speaking truthfully when they claim they don’t want power is irrelevant. Once they have power, they have it — and eventually they’ll use it. Perhaps bad news, but …
Restrictions? This is American crybabyism. We are only too happy to import all the foriegn goods we can on cheap foreign credit, but then when the foreigners want to cash in (be repaid) suddenly protectionism is called for.
The subprime crisis, mounting gov’t deficits, and the like are all the result of people trying to get something for nothing… now the supposedly-averted bill is coming due.
I second Shrek’s proposal. We ought all shut up and suffer a little, think of it as penance for our sins. Protecting us from consequences simply postpones them and generates moral hazard.
I should have added: If the SWF’s indeed do manage badly, on a free market they’d simply lose capital, which would transfer to those more capable of using it. SWF abuse of power would be self-correcting.
(Great. Now, if we only had a free market.)
bsetser: 2fish — I was thinking of more demanding restrictions. Funneling SWF money through a multilateral agency that does the investment. Limiting sovereigns to equity index funds. And so on. Basically, a tightening of the current regime.
The trouble with this scheme is that you’ll end up with a scheme that is far more intrusive than anything that is being contemplated right now. For example if you funnel all sovereign wealth fund through a single agency, that agency is going to run the world economy. Rather than have ten independent funds each with $200 billion in assets controlled by different countries with different interests, you now have a $2 trillion super fund controlled by one entity. A very odd solution if your fear is “government intervention in the markets.”
The problem with limiting sovereigns to index funds is defining the index. I can create a “Stocks which are interesting to the Chinese government” Index. If you force everyone to invest according to the Standard & Poor 500, then Standard and Poor is going become a defacto portfolio manager and going to have immense amounts of power listing and unlisting companies from the index. Once you have about $50 billion of assets under management, index investing is no longer possible since you start moving the index.
And it gets worse because the entity that does the indexing doesn’t lose anything if they do something really stupid. Can you say “corporate bond rating agency” for the problems that can result when investment decisions are made based on a third party that doesn’t lose anything much if those decisions are bad.
And of course there is the problem of defining “sovereign wealth fund.” If you put SWF’s under a large number of restrictions then the agency that defines who is and is not an SWF is going to have immense power.
Current laws is that they don’t care who the owner is, and US corporate law is set up so that large public companies can usually ignore their shareholders. If you want to look at the structure of your average US corporation it looks a lot like the structure of the old Soviet Union with the Board of Directors being the Politburo, the CEO being the General secretary, and the shareholders being the rubber stamp legislature. Corporations are basically centrally planned mini-states. The only thing that makes things different is that there are multiple mini-states.
Also about “influence.” Of course having 5% of a companies stock will get you “influence” but so will buying 300 planes from Boeing, being a supplier of raw materials, or dating the CEO’s daughter.
The basic problem is that the aims are self-contradictory. The idea is that in order to guarantee that governments don’t intervene in the markets and that decisions are made by private companies is to having government intervention in the markets to override the decisions made by private companies.
Steele: foreigners want to cash in (be repaid) suddenly protectionism is called for.
It doesn’t seem to me. None of the presidental candidates have made this a major issue, and no politician that I know of is really bashing the SWF’s or has even flagged this as an issue.
The reason is obvious. If the Chinese don’t bail out Morgan Stanley, who will? If there is any opposition to this, CIC is going to just say “no problem, we’ll take our billions and go elsewhere.” At which point you have to deal with lots of angry unemployed investment bankers, and that’s if you are lucky and don’t cause the banks to go under in which case, everyone gets angry at you.
one point that hasn’t gotten enough emphasis here is that if china buys a lot of fx and restrains domestic demand so that it has a lot of spare savings to channel abroad (and if oil exporters save rather than spend their windfall as a matter of policy) then someone elsewhere in the world has to spend/ invest more. interest rates globally will fall until that happens, or until the accumulators of spare savings conclude the return on their investments is too low.
that in some sense has happened. but faced with a all in the return on safe investments, governments globally have decided to take more risk rather than than save less.
2fish — you are right that if a single agency got to control all the postulated sovereign flows, it would become way too big too quickly. but that highlights the core problem — unless there is adjustment, the same will happen with some sovereign investment funds. the key is adjustment; a world where the us can only fund its deficit with over a trillion in official asset accumulation is not one that poses many happy choices.
So foreign investors may gain a large amount of influence in the US economy. Is this anything to fret about? I would welcome it. They can hardly do worse than we ourselves have done over the past five years or so and may well do much better. After all they may still have some good sense left and brains enough to know how to manage risk, etc.
Good post, Brad.
Just a comment on a very common orthographic mistake that keeps on appearing in your posts, as in “resistance to reigning in American hedge funds”…
Rein something in/back (ACTIVITY) phrasal verb [M]:
to control an emotion, activity or situation to prevent it from becoming too powerful.
Unless one refers to the ‘reign’ of Philip II or the figurative reign of China over the present financial world, the correct word is ‘rein’…
Thanks for the great post Brad. This is what I’ve been bitching about for a while now.
Twofish sez: Also about “influence.” Of course having 5% of a companies stock will get you “influence” but so will buying 300 planes from Boeing, being a supplier of raw materials, or dating the CEO’s daughter.
Agreed. But all these ways of wielding influence vary in degree, directness, and transparency. Ownership has its unique properties with respect to influence. For example: Other buyers can often be found and other suppliers too. There are also many boy ‘fish in the sea’, so to speak, for the CEOs daughter. But one purchases, one owns, and one can use this ownership to wield power until one decides to sell. This is one difference. There are many others.
Twofish also sez: The basic problem is that the aims are self-contradictory. The idea is that in order to guarantee that governments don’t intervene in the markets and that decisions are made by private companies is to having government intervention in the markets to override the decisions made by private companies.
Twofish, the market is not monolithic and whatever form it takes is not something handed down by God. It is a creation of and is supported by governments. A total separation of market and state only exists in the febrile minds of libertarians. This doesn’t mean governments must or should micromanage of course. But governments are needed when it comes to setting broad policy. Who else will do this? The plutocrats and their house economists at Davos?
Also, you’re being disingenous here. We’re not talking about government intervention in general. We’re talking about foreign government intervention. Even in the neoliberal globalizationized times we live in there is a difference.
“one point that hasn’t gotten enough emphasis here is that if china buys a lot of fx and restrains domestic demand so that it has a lot of spare savings to channel abroad (and if oil exporters save rather than spend their windfall as a matter of policy) then someone elsewhere in the world has to spend/ invest more. interest rates globally will fall until that happens”
Not so. They buy FX in response to someone else spending more, not vice versa.
guest — I disagree. In case, right now the US isn’t sending more, and China is still buying more. China reserve accumulation has gone up with the US slump. the test here — as both Wolf and Bernanke have argued — is the level of US long-term rates. If the US has to pull in funds to cover its deficit, one would expect high rates in the US. Instead we see low rates in the US, and globally.
I’ll try to rein in my spelling mistakes as well.
2fish
“The trouble with this scheme is that you’ll end up with a scheme that is far more intrusive than anything that is being contemplated right now. For example if you funnel all sovereign wealth fund through a single agency, that agency is going to run the world economy. Rather than have ten independent funds each with $200 billion in assets controlled by different countries with different interests, you now have a $2 trillion super fund controlled by one entity.”
Ahh, do you suppose that recent excesses of financial operators might actually lead to some form of world government and long needed limitations of state sovereignty and uncontrolled exercise of power by trans national corporations? Too good to be true, 2fish.
If you label it as political no matter what evidence is out there, then it will be political anyway.
More and More Hypocrisy
The angst over the China CIC purchase of US assets is entirely overblown. US multi-national corporations have far more direct investment in China than the opposite. The US Chamber of Commerce and US Embassy personnel representing US multi-nationals in China attempted to lobby the Chinese government against the recent labor legislation that imposes strict employer regulations. Isn’t that US government interference in China’s domestic sovereignty and internal affairs? Why doesn’t US government care about the Human Rights of Chinese workers employed by US multi-national companies in sweatshop working conditions?
In comparison to China’s direct investment in Southeast Asia or even the African continent, Chinese holdings of US corporate assets are a drop in the bucket. The China CNOOC attempted buyout of California Unocal was an exception to the rule. China CNOOC was interested not in Unocal’s minimal US oil production, but the large holdings of energy assets in Southeast Asia including Burma. In yesterday’s news, in exchange for exclusive rights to develop Africa’s Congo copper reserves, the China State Council approved a $6 billion development grant that will be used to build roads, schools, railways and other infrastructure in Congo.
Americans shouldn’t worry so much about Chinese CIC investment in the US. Frankly, the Chinese government official policy has been to diversify to other markets around the world from overdependence on the US market. Why would the Chinese want to concentrate investment in the US Economy when other more profitable ventures abound in the global economy?
Jan. 25 (Bloomberg) — Banks worldwide may need to raise as much as $143 billion of additional reserves to satisfy regulators if bond insurer rating cuts trigger downgrades for the securities they guarantee, Barclays Capital analysts said.
Banks will need at least $22 billion if bonds covered by insurers led by MBIA Inc. and Ambac Financial Group Inc. are cut one level from AAA, and six times more for downgrades by two steps to A, Paul Fenner-Leitao wrote in a report published today. The estimates are based on banks’ holdings of the outstanding $820 billion of structured securities covered by bond insurers, the report said.
Twofish says: “It doesn’t seem to me. None of the presidental candidates have made this a major issue, and no politician that I know of is really bashing the SWF’s or has even flagged this as an issue.”
demonstrating that SWFs haven’t arisen in focus group sessions; I think they’ve not come into general public consciousness yet.
Setser is particularly on target that we have a situation that “is not one that poses many happy choices.” My fear is that any politically feasible restrictions on SWFs would be, or morph into, restrictions on capital flows in general. Some cures are worse than the disease.
Hallo
“Property without power?” = walking without legs?
1. What can be used as a political instrument, that will be used; each has its own time.
That is no question, that is clear. (No new decoupling discussion)
Evidence:
- each history of each country of the big ones.
- today for example: in Europe the NATO- and RU-Military tells each to the other, that they will use -again- atomic bombs for a first hit.
2. Are the SWF instruments of politcal power?
Big funds are very nice instruments:
- for building up econ. colonies
- for buying ´our own rogue dictators´
- for helping smaller countries in finding “those exactly right decisions”
- for indirect actions: help for the enemy of the enemy
- …
And: you get all this good things without a bullet; just CNY, USD, …
Big funds are also a good intermediate station on the “Long March To The Heaven-Rose”, the RMB-Global-Hegemony.
A lot of nice things are waiting for the winner:
(For example: the others are send you material and you can send paper back.)
(Will we see an Union of EU and US?)
3. Will China make use of this very nice instrument “SWF”?
That is the same question like: does a camel prefer three or four legs?
4. Will China give us a surprise and will make a different politic?
I hope, they will not.
For my case, I have enough of “new politics”.
Because: all “new politic” is the old one. (go to Thukydides).
5. We have to understand one thing:
We are global, we are in the global 21century: each single Mr. Anybod of us is global .
- Check the stuff, that is around of you, incl. you slip
- An action at the stock-exchange of Manilla has an effect on your pension-money.
- wars, eruptions of bad governed people and outbreaks of almost idiotic gov. actions in any country have tentacles to everybody on the earth
- funny Wall street money-models have effects round the world, down to your purse
- …
6. Is there hope?
Yes. But forget it. It is lost time.
The first job is:
Mr. Everybody from everywhere has to control his elits.
The second job is:
Mr. Anybody from anywhere has to understand, that Mr. Anybody is Mr. Everybody for each to the other round the world.
Then we can see further on.
Till then there will go a lof of water down the nil.
globumedes
There are some articles in FT.COM summing this up well.
http://blogs.ft.com/davosblog/2008/01/swfs-can-beggar.html
And as Mohamed Al-Jasser, vice-governor of the Saudi Arabian Monetary Agency, said that such statements implied that “the sovereign wealth funds are guilty until proven innocent”.
Brad Lighten up. Have a few TsingTao beers from the majority state-owned Chinese brewery company
http://www.tsingtaobeer.com
Why a US Recession won’t stop China’s Economy
http://www.safehaven.com/article-9307.htm
Some may dismiss a positive outlook by arguing that China’s fate is ultimately dependent on the US economy, which is clearly slowing down. However, these skeptics should remember that today the US only accounts for roughly 20% of Chinese exports which are still rising. So, a decline in US consumption and the ensuing slowdown in its imports will not cause the Chinese economy to come to a screeching halt. Furthermore, it is worth noting that today, Japan, Europe and the US combined account for less than 50% of China’s exports. In other words, due to globalisation and the integration of the world’s economy, China now exports more to the developing nations and on top of this their market-share is still rising.
Dave Chiang on 2008-01-25 08:32:56,
“Isn’t that US government interference in China’s domestic sovereignty and internal affairs?”
No. That in my opinion is one of the key problems between the west and others. Others often think, our corporations speak for us. Indeed it is vice versa. At the moment they are among our worst enemies.
They tell us we are not competitive and have to cut our wages/social benefits. The result: A shift in power from the people to the money. Of course they tell the Chinese gov. that it would have horrible consequences if they apply social or environmental standards. But this is not true. Western people would demand at the very same moment even better standards. It just would shift power from money to people.
I don’t know about the current US gov, but in general western govs work for their people. They are blackmailed by the same people who try to blackmail the Chinese gov.
Hallo
for information:
DB has a short and practical overview on China.
(update per 15.jan. 08
“Key economic indicators: China”
http://www.dbresearch.de/servlet/reweb2.ReWEB;jsessionid=4b32%3A479a2206%3A9de14792a7a8e8bb?rwkey=u1562160
globumedes
“guest — I disagree. In any case, right now the US isn’t spending more, and China is still buying more. China reserve accumulation has gone up with the US slump. the test here — as both Wolf and Bernanke have argued — is the level of US long-term rates. If the US has to pull in funds to cover its deficit, one would expect high rates in the US. Instead we see low rates in the US, and globally.”
I believe that a current account surplus and reserve accumulation are each subsets of gross capital outflows, and distinct from each other.
If China is buying more FX to recycle its current account surplus, then they’re doing it primarily in response to somebody else buying Chinese stuff. This doesn’t mean the US is necessarily that somebody.
If China is buying more FX to recycle capital inflows, then they’re not doing in response to their own saving, so the point is moot.
As far as interest rates are concerned, one can only truly defend the savings glut thesis if one also believes that interest rates are determined by the global savings glut and only by the glut. Otherwise, the evidence for the existence of such a glut is speculative and the thesis is somewhat conjectural. We know that the recent extreme rally in treasuries was not the result of a change in the savings glut condition. What other interest rate changes haven’t been. So what have?
In Congressional testimony, Fed Chairman Bernanke stated recently that the China PBoC can “never” sell the 1 trillion in US Treasury and GSE bonds since it would implode the global financial system and also result in crippling the Chinese economy. The Chinese Central Bankers and government are smart enough to recognized that they are being held in “monetary blackmail” to the financial manipulation policies of the US Treasury and Federal Reserve (ie. US Dollar hegemony regime ). So while it remains highly unlikely that the China PBoC will resort to the “nuclear” monetary option of dumping the US Dollar unless the US directly supports a formal declaration of Taiwan Independence, it is likely the Chinese government will continue to take financial and industrial policy measures to mitigate its dependence on the US Economy and financial system.
DC — the easiest thing china could do to mitigate its dependence on the us would be to drop the peg!
Guest — the WEO data (imf data appendixes) shows a rise in global savings outside the US and Europe (driven by China and the oil exporters). I agree that the recent collapse in treasury yields is due to a change in the us outlook and the expected path of the fed. but low rates in an capital importing country sometimes are hard to sustain — as the country has to attract continued inflows. and if you look at the weekly data on the fed’s custodial holdings, we know where those inflows came from (at least last week).
would any one care to pick up on the four limits I identified to the notion that sovereign money is “apolitical”, or for that matter 2fish’s rebuttal to those points? I would be interested.
Brad, why doesn’t the US Treasury issue a formal statement that it has absolutely no objections to oil, gas, and other natural resource commodities to be priced in Euros, yen and yuan. Then the China PBoC can oblige you and drop any linkage to the US Dollar in its currency basket. The Iraqi Central Bank should also be free to price oil exports in Euros, not US Dollars. US Dollar hegemony must be terminated to address global economic imbalances.
“So long as governments are resisting more rapid balance of payments adjustment, they will have a lot of funds to invest. Overall sovereign asset accumulation is still trending up — both in the oil-exporting world and in oil-importing Asia”
Brad, SWF’s clearly throw a monkey wrench in global trade re-balancing efforts; since their feedstock is derived from the trade imbalances. It seems that they will lobby in their home country to continue the BW2 game as long as possible.
I can also see them setting up shop on K street to try and prevent a US political backlash.
Have you heard any national security concerns at the CFR over the SWF trends?
they already have set up shop on K street — see today’s WSJ!
the cfr debate focuses as least as much on investment protectionism (a concern of the street) as on nat’l security, at least in nyc. and in some sense the cfr debate on this is just getting started.
1. No commercial financial firm is set up to earn negative real returns
That’s probably true, almost by definition. But if you look at SWFs in perspective, they are more a result of economic imbalances than they are political policy per se. One can imagine some alternatives, such as pouring reserves into “defense” -can you imagine the potential SWF the US might have had if they had spent only moderately less on the military in the past decade?
Here in Iceland more and more people are advocating adopting the Euro in one way or the other. Joining the EU seems almost inevitable, in the long run, and doing away with an Icelandic fiscal policy would probably have a calming effect here. The only reason the Icelandic krona hasn’t been raided more heavily is probably how small our economy is. Not worth the bother, so to speak.
brad setser and dave chiang – whatever your disagreements you clearly share one great obsession : how to force the obese flab of the great globalised economy into the tight laced corset of a totally bogus cold war scenario of – ‘china v. america.’
you should both agree to take time off to go and do something really useful : count the gold, silver, and bronze medals won by each nation in the forthcoming olympic games.
as for excess saving forcing other people into excess consumption – it does indeed seem unfair that so much of this burden should fall upon a mere one per cent of the u s population.
.
Can someone please explain to me why foreigners continue to lend us (us Americans that is) money hand over fist? Consumer debt is approaching one trillion dollars, our national debt is out of control and more than likely, we will default on this debt. Thus if and when that happens, will foreigners continue to lend us money hand over fist? What will be the consequences? I do have to admit, it is a great scam for us Americans to pull this off; we borrow money and live like kings and queens (i.e. large suv’s big flat screen televisions, big McMansions, etc… all on borrowed money from other people of course) and then when the bill comes due, we default on it. I love it, LOL, LOL, LOL.
On (1), I do not think that any currency losses should be regarded as the responsibility of the SWF; they are due to the currency policy. A SWF should be judged by its marginal contribution, which in the case of a dollar pegger means something like a treasury benchmark.
On (2), in some cases, a country’s currency and reserves policy arguably represents a collectivised savings scheme. So why not drop the capital outflow restrictions and let the citizens do their own overseas saving? I wonder whether it is to do with the possibility that overseas wealth gives citizens the security to develop into a political opposition (eg Boris Berezovsky here in the UK).
On the politics of SWF investment, it seems to me that defence is as important as offence. It is hard to refuse SWF capital injections into banks at the moment. I doubt whether they will get thanked for it if is successful (see Lone Star / Korea Exchange Bank).
Gillies — i guess your comment is my punishment for ignoring your multilateral v unilateral comment on the previous thread (the answer is that i am by inclination a multilateralists — i worked at the imf for a while even — but am increasingly frustrated by the impotence of multilateral institutions).
I would argue that China tho matters b/c
a) with $500-600b in official asset accumulation, it is close to 1/2 the global total
b) its SWF will likely have a much stronger mandate to support chinese economic development (and redress the imbalance between foreign investment in china and chinese investment abroad), which makes it different from other funds
c) China’s policy is a constraint on the rest of asia — note the strong reserve growth of thailand and india recently b/c they want to resist appreciation v china.
basically, china matters to the global system in a big way now, but it is different from the other big players in three ways:
1) its political system
2) the de facto gov monopoly on outward flows (one that has emerged not from regulation but from the market, as chinese residents don’t want the fx risk — )
3) a different exchange rate regime from the other major players.
also note that the unusual feature of the global economy today is that china has a big surplus when oil is high despite being a big oil importer.
rebel — on 1) the fact that SWFs are an instrument of currency policy shapes my views on a host of other issues; a big part of me thinks that one of the prices those following a mercantilistic fx policy should pay is being forced to hold low yielding stuff. call it a disincentive for excessive reserve growth. the sov funds are trying to change the BW2 game — to get good returns and the export subsidy.
on 2) china has effectively liberalized its controls on capital outflows; the problem is that given the fx risk chinese savers do not want to hold dollars. look at the fall in $ deposits in the domestic banking system (hong liang has a nice chart). the constraint on capital outflows from the gulf isn’t controls but the fact that most of the oil surplus never finds its way into private hands
Hey Brad, other Asian bloc nations aren’t complaining about the issues the US government raises about China, which either means they are in collusion with the Chinese government, or that the US charges against China are totally bogus political charges. Japan’s and Korea’s economies are doing just fine thanks to booming Chinese demand. The moron economists at the US Treasury and Federal Reserve have no one to blame but themselves for the economic bubbles that have massively misallocated capital in the US Economy.
South Korea’s Growth Faster Than Estimated on Exports to China
http://www.bloomberg.com/apps/news?pid=20601080&sid=acY2132MWIeM&refer=asia
Japan’s Hitachi Construction Net Rises 13% on China exports
http://www.bloomberg.com/apps/news?pid=20601080&sid=a1Xvs_q5yzrI&refer=asia
Quote of the Day:
“The Federal Reserve should raise interest rates to bolster the U.S. dollar and fight inflation even at the cost of a recession, investor Jim Rogers said. ‘We should be raising rates to save the dollar and combat inflation… Recessions are good for an economy. They clean out excesses. You go down and then you start over from a sound base. Putting band-aids on to try to hold this thing together is madness.’” – Jim Rogers
DC — look at what the Asian central banks do, not what they say. india is very clearly intervening. and there is enormous social pressure on the government not to let the rupee appreciate after the enormous increase in imports from china following the move earlier this year.
Hi, Brad,
Sad news again. By P. Krugman:
Who gets stimulated ?
Fast work by the people at the nonpartisan Tax Policy Center, who figure out who gets what from tax plans. They now have distribution tables for the stimulus proposal announced yesterday, and they more or less match my expectations.
Here’s what it looks like, by quintiles of the income distribution:
Distribution of rebates
I’d guess that the top two quintiles are unlikely to be liquidity-constrained, so the rebate will have little effect on their spending. But they get 58% of the money. The bottom two quintiles, which are the place you’d most expect to have an impact, get only 21% of the money. Split the difference on the middle quintile, and you’ve got a plan where around 2/3 of the outlay is likely to be ineffective.
Now. I’ve been in touch with some people on the Hill, who say that the glass is best viewed as 1/3 full rather than 2/3 empty — that it’s only thanks to the Democrats that people likely to spend their rebate are getting anything at all. And they have a point: this plan will produce some stimulus, while the Bush plan would have done virtually nothing.
And I suppose that it may be true that this was the best Nancy Pelosi could get. But I just can’t bring myself to celebrate.
Much as I dislike engaging DC, I echo Brad’s point about what Asian central banks do–de facto not de jure. Look up when Malaysia depegged.
Brad, I personally don’t know what the story in India is since I have never visited the country, but from relatives that have visited the nation, outside of the booming software industry in Bangalore, India isn’t competitive with developing China or even Southeast Asia in manufacturing and technology. Critical infrastructure in India lags decades behind China. The highway and railway system can best be described as a horrible mess. India’s economic problems are mostly self-inflicted, not caused by Chinese competition. Perhaps the most saddening images of India according to my relatives is the teeming street population of children street beggars. This is something that you absolutely don’t see in China. In China, the trains actually run on time, the streets are cleaned daily, and orphanage children are fed and attend school. Contrast India to even Malaysia where I have some relatives. Contrary to Western perception, Malaysia has state-of-the-art infrastructure of highways, metro railways, communication systems that in many respects surpasses cities in the United States. Malaysia’s capital city is a gleeming metropolis of several different ethnic groups including Malay, Chinese, and Indian. The Asian state-driven developmental model works.
koteli,
If the goal of the “stimulus” is to give money to businesses, why involve consumers at all? Why not just lower corporate taxes? Perhaps a negative VAT, or something fancy like that?
If you need to pretend that they are doing something useful for the money, defense spending is also a very effective way to give money to American businesses, as most contractors are in the US. Whereas if you give money to Joe Sixpack, he spends it down at Walmart and the dollars go straight to you-know-who. Don’t need all those cutting-edge fighter planes? Just dump ‘em in the bay. Even better, dump the ones you do need, then build more. Isn’t war always great for “the economy?”
And if the goal of the “stimulus” isn’t to give money to businesses, why do you care whether it’s “effective” or not? What, then, do you mean by “effective?”
Occam’s razor tells me that the argument between Democrats and Republicans on this question is straightforward. The principal issue is whether the “stimulus” should go mainly to Democrats, or more or less equally to Democrats and Republicans. I mean, the band may have been playing as the Titanic went down, but at least they were playing. The brass and the strings weren’t milling around and whacking each other over the heads with their instruments, each side vigorously asserting that the other was the fundamental cause of icebergs.
No, it’s Washington as usual: when in doubt, buy more votes. It’s sad to see people still participating in this desperate charade. And sadder to see them dragging out the old Ezra Pound economics to support it.
DC — on current trends, we will get to see how the Asian-state driven development model works first-hand here in the US, since the CIC/ Chinese state banks will be financing a decent amount of us investment …
$400b is roughly 3% of US GDP, or around 1/6 of uS investment. and that is how much i estimate china sent to the us in 07, and there is no reason to think that will change in 08.
Brad, the CIC/ Chinese state banks will be financing mostly investment in developing nations, not the United States. For instance, China Mobile has just concluded the purchase of a Pakistan’s wireless phone provider financed by Chinese state banks. Moreover, the massive scale of China’s recent foreign direct investment into the Africa continent far exceeds Chinese investment in the US today. Chinese companies are everywhere across Africa today from oil production, dam construction, copper mines, railways, banking, defense products, telecommunications, etc.
dc — alas, on this, you are wrong. the scale of china’s investment in africa, while large relative to other flows into africa, is still small relative to china’s purchases of us assets. the same applies to pakistan. if you are running a $350b surplus/ adding $500b plus to your reserves/ f. assets and peg to the currency of a country with a $750b deficit, you end up financing the country with the big deficit. Chinese flows to the us exceed chinese flows to the emerging world by an order of magnitude.
> Brad, why doesn’t the US Treasury issue a formal
> statement that it has absolutely no objections to
> oil, gas, and other natural resource commodities to > be priced in Euros, yen and yuan.
Because the US would implode under their worldwide Ponzi scheme.
(Sorry Brad, for off-topic and a bit long)
Dear moldbug,
I don’t believe at all in a democracy of two parties anywhere in the world, but less in a country where voters count lower than %40.
I’m afraid that you believe in “less government more freedom” theory and Austrian economics.
I’m not an economist and I make my living from designing and my best client is from the USofA. So, I’m an like an Indian competitor to you, but in design.
In my country (Basque Country) we’re suffering b/c Spanish government is making illegal a party for not condemning the violence of a terrorist group, leaving a 10 to 20 percent of the population out of elections. They are using a sort of Bush doctrine to decide that you are not eligible.
Anyone believing in law would say that as far as you’re not guilty of a crime, you are a good citizen. But not, if you don’t condemn crimes, you are not a citizen. That’s the new doctrine, does it sound you?
But in my country no party wins never. They have to make arrangements between different parties. And that changes things quite a lot.
Here in Europe, we believe in elections and we have very bad governments, but we have universal health care, universal pension system and a very cheap university education system (not of the class of Harvard, of course).
Those things have been got by the “bad” parliaments we have, after years of fight between classes. We may call classes what you call quintiles. Who knows?
I don’t mind at all if stimulus goes to Democrats or Republicans, or to Obama or Clinton, I don’t believe on that.
I have a feeling that Brad, Krugman and Dean Baker are the best economist of USofA, out of the MSM and speaking their mind, a great contribution in those sad times.
Nothing more nor less.
PS: I enjoyed a lot reading “Cathay” poems, by Ezra Pound, as enjoyed reading “Voyage au but de la nuit” (Journey to the End of the Night, by Céline). Everyone has a part of truth, but if you look for justice you have to find to find it in other places or writers.
In the US political power costs money. Tons of it, and politicians usually feel the need to repay in one way or the other though policy or other favors.
In China, rise to power is a much more complicated matter. While it takes place on only one political party, I am sure there are wheels within wheels and support from fellow party members is not for free, but I don’t think there is anything like the corporate loyalty/campaign funding that is considered normal in the US.
The oil funds importance is even more cynical, apart from Norway and Canada’s there is not even a political struggle for power in these countries. You’re either part of the ruling family or not.
I think one needs to be philosophical about the SWF, to a degree. They are mostly unable to use this wealth locally. Norway is trying to avoid the inflation which would follow if they channeled their oil profit into the economy there. (they have an educational system which is desperate for funds, a health system which is plagued by months and months of waiting lists across the board, and the care for elderly is considered to be shockingly bad).
But money means power, and power means politics. How this will play out in the American political system remains to be seen, but it will definitely have solid impact one way or the other. Bush wants us to believe that one dollar is as good as the other, and he’s welcoming these dollars back home, but if that were true we wouldn’t know the concept of money laundry, would we? No, money has history, and is always characterized by whoever owns it at any given time.
You don’t pull strings without money in this world, not in politics. But isn’t it too much when you have countries that are basically free of politics (dictatorships), poised to pull strings in countries that are always enjoying political struggle?
Instead of CIC, let ICBC take a 9% stake in Citigroup, to mirror the BofA deal in CCB. Would that be ok ?
We already know the answer: ICBC, though publicly listed, isn’t really- Chinese public listings are fraudulent, ICBC’s dealings are non-transparent, and ICBC really only answers to the State Council, not to its shareholders.
“the fact that SWFs are an instrument of currency policy shapes my views on a host of other issues; a big part of me thinks that one of the prices those following a mercantilistic fx policy should pay is being forced to hold low yielding stuff. call it a disincentive for excessive reserve growth. the sov funds are trying to change the BW2 game — to get good returns and the export subsidy”
Brad, I’m starting to get some bad vibes on how the SWF game may play out. If they evolve into Super Hedge Funds, they will really be able to cause tremendous mischief around the world. The West causes enough damage to it’s self, through it’s own financial shenanigans never mind what other groups with completely different political agendas might do.
Currently, in the West we have lousy financial schemes(usually ponzi), rogue traders, market manipulation by the PPT and others looking for political gains or unfair(manipulated) profits.
What happens when the SWF’s learn about these tricks and put them into play for their own long term political plans?
In particular I’m very worried about Russia and China. Both have countries with countless hackers that could be combined with current Super Computer technology that would give them superior hands to play in world markets.
> If they evolve into Super Hedge Funds, they will really be able to
> cause tremendous mischief around the world. The West causes enough
> damage to it’s self, through it’s own financial shenanigans never
> mind what other groups with completely different political agendas
> might do.
I would encourage the Thais to set up a SWF, recalling some guy named, ummm, Soros.
To be fair, what the world needs is a counterbalance against predatory hedge funds engaging in speculative attacks against currencies. And the most dangerous currency “hedge fund” of them all is none other than US Treasury and their friend, the Fed, which proxies for US commercial interests/Wall Street.
One would hope that SWFs can provide some international checks and balances, and stop asset bubbles in their tracks, and provide some measure of fiscal discipline to those in charge of world money supply.
Off-topic:
I’ve been reading your recent paper on China:
“The CIC’s initial funding was largely used to purchase of Huijin (the central bank’s bank recapitalization vehicle) and to complete the recapitalization of the large state banks. The CIC’s investment in Blackstone and Morgan Stanley are small relative to the CIC’s investment in the state banks.”
I’ve always been confused on this. The CIC was set up to manage some of China’s foreign currency assets instead of SAFE.
Was this recap exercise done in RMB denominated capital? I.e. was the recap separate from everything else in terms of its nil effect on FX reserves? Or was there an FX exposure involved here?
anonymous –
you have every reason to be confused; it took me a couple of years to figure out how the bank recap worked (in large part b/c china wasn’t very transparent about how it worked).
in the initial recapitalization, the pboc lends fx to huijin (and who promises to pay the fx back to the central bank — creating a domestic asset). Huijin then hands the fx over to the banks in return for equity. The banks then have fx as part of their capital, which they can invest abroad. they also generally got the right to hedge their fx exposure with forward contracts with the central bank.
when the cic purchases huijin, it basically used some of the rmb 500b it raised initially to buy the pboc’s claim on huijin. the easiest way to think of it is as follows — the minfin raised rmb 500b, and bought $80b from the pboc. the minfin handed the fx over to the cic, which then paid $67b in fx for one of the pboc’s existing domestic assets. the net result was a $13b shift in fx to the CIC.
or put differently, the cic basically gave the pboc the fx it gave the banks back in 03/ 05 back, and in return gave some of its fx to the banks …
in all honesty, this could be accompanied simply by using some of the rmb 500b to buy the pboc’s domestic claim on huijin — and in effect for the cic to buy the fx exposure that was shifted to the banks back in 03 and 05.
I have confirmed tho the $13b fall in reserves from the $80b initial CDB allocation — and the basic accounting here. it is right.
the CDB recap is simpler — it was done in the same was as the earlier Huijin recaps of Boc and CCB. the CIC gives the CDB some fx (not clear if the CDB also got a hedge) and in return got CDB equity capital. that all works from a Balance of payments point of view so long as the CDB invests the fx abroad and doesn’t try to convert it back into rmb. basically, some of the CIC’s fx was handed over to the CDB to manage …
guest with the ICBC example — you hit the nail on the head. ICBC is very much state-owned, so there isn’t a deal that matches BoA/ CCB or goldman/ ICBC that doesn’t involve a major increase in Chinese state ownership of the US banking system. and given the way the state banks have been used in china historically and now, that is a bit worrisome. i understand the chinese desire for reciprocity, but the enormous difference between the us and chinese system makes it hard. the USG doesn’t own uS banks, and it doesn’t use them to support a currency policy designed to subsidize the US export sector.
guest — if the rest of the world wants less exposure to us fiscal and monetary policy, they should stop pegging to the dollar and building up their holdings of treasuries. easy. no need to set up a hedge fund to speculate against soros.
Mr Setser – what do the SWF’s want? Depends on the fund. If I were Gulf States, and I had just read Porter, I would want jobs to fill the empty office towers. This means complanies like Citibank will move back office jobs to Dubai, not New Jersey or India. This would be my price.
If I was Saudi, I would want to become a big payer in the energy industry both up and downstream, and yes, that means jobs. I would buy a chunk of a big engineering firm and force the work for plants in Saudi to be done in Saudi. I would also but up energy players around the globe to diversify by market and sector.
I hope you get my point.
anonymous — i agree that sovereign funds will be under considerable pressure to support local economic development, and the sovereign funds from places like the China, Russia and saudi arabia will face more such pressure than the funds from the small gulf sheiks, which are really royal wealth funds.
there tho are complex macro issues if one reason for the fund in the first place is to support an exchange rate regime, and that supporting the exchange rate regime means investing abroad not home. the CIC has gotten around this by helping chinese firms raise funds to expand abroad, or by placing fx with Chinese state banks to invest abroad. but it is a real issue. some sov funds have to invest abroad, but want to do so in ways that support national economic development.
p.s. don’t forget about abu dhabi’s investment (through mubadala) in ferrari, the resulting ferrari theme park in abu dhabi … not a real threat, but still an interesting example of a two-fer kind of investment)
Mr. Setser – we in Canada regularly have a discussion about the importance of head offices. I have noticed in several blogs that SWF’s are forcing you Americans to have these arguments.
My opinion is when the SWF’s start to throw their weight around, we will see more of this sort of discussion. In my opinion it is the small Gulf Sheiks that will force the issue – they want to develop an income stream for when their oil runs out and I feel they will be the most aggressive in moving desirable jobs out of developed countries.
AS for Ferrari, at least in the Gulf they have the oil and flat roads to drive the things as they were meant to be driven.
Thanks for the explanation of the Chinese bank recap.
Perhaps you could confirm if my understanding as per the following is correct:
At each stage of the process, the funding or capital entry is/was denominated in RMB, even though the funds advanced are/were FX funds – i.e., the following balance sheet entries are/were denominated in RMB:
PBOC/Huijin; Huijin/banks; CIC/Huijin; CIC/CDB
But the funds that ended up with banks were FX, which the banks invested.
Because bank capital is denominated in RMB, the banks ended up with a currency mismatch.
So the banks could undertake forward contracts with PBOC to hedge that mismatch.
And CIC’s purchase (effectively) of PBOC’s interest in Huijin was the purchase of an RMB denominated asset with RMB, allowing PBOC to repay some its liabilities, thereby transferring that portion of the (ultimate) burden of sterilization from PBOC to CIC.
If the banks do hedge dollars (for example) forward with PBOC, then PBOC effectively retains some exposure to the US dollar (actual depreciation net of a rolling contracted differential), in addition to its on-balance sheet currency exposure (although it hasn’t had to sterilize the funding effect).
The Financial Times reports that there is a debate about establishing a SWF in Japan.
A group of senior politicians from the ruling LDP party, including Shinzo Abe and Yuji Yamamoto, a former financial services minister, plan to establish the fund within 12 months.
The plan is opposed by the current finance minister, Fukushiro Nukaga.
His ministry says “there could be a public backlash if the fund should make a loss.”
They point to “…international criticism about sovereign funds’ lack of transparency and the negative image such funds suffer from.”
“Sovereign wealth funds are for developing countries,” said one financial regulator…..the management of such a fund could be outsourced, the risk management could not..”
“Proponents of creating a sovereign fund argue that keeping Japan’s foreign exchange reserves parked in US Treasuries, where a large proportion of the funds are believed to be invested, is risky.”
http://www.ft.com/cms/s/0/f8f4c7e8-d0e9-11dc-953a-0000779fd2ac.html?nclick_check=1
Given the determination of the group to establish the fund in the face of opposition from it’s own finance minister, and the required expenditure of political capital, one would have to wonder about the circumstances that have precipitated this move.
Are they afraid of yet more appreciation of the yen or is it something to do with participating in equity injections for troubled national or international financial institutions?