If the UK wants to increase financial transparency …
Gordon Brown argues that the ‘transparency deficit" in the global financial system needs to be corrected.
I have a couple of specific suggestions for UK policy makers looking to flesh out the Prime Minister’s vision.
1) The UK could insist that sovereign funds looking to set up shop in London meet a high standards for disclosure. If the forecasts from banks like Merill Lynch are to be believed, sovereign funds may soon be adding $1 trillion a year to their assets. At that pace, to paraphrase a Ken Rogoff quip, sovereign funds quickly will become the global financial system. Even if those forecasts don’t pan out, some black boxes look set to get big fast. A lot of them seem to have large operations in the UK. Without a bit more (retroactive) disclosure of the broad contours of their portfolios (of the kind in the IMF COFER data), it will be hard to assess their contribution to any future "underpricing of risk."
2) Upgrade the UK’s balance of payments statistics to match the US statistics. Specifically, the UK could provide a breakdown of the geographic origin of inflows to the UK and the official/ private split. As more and more global flows move through London, the absence of more detailed data increasingly impedes real time and historical analysis of global capital flows.
The UK’s data is here. Best I can tell, even in their comprehensive annual publication, the UK only provides a geographic breakdown for the current account, not for the financial account.
If competition among financial centers for sovereign fund business precludes any effective pressure on sovereign funds to increase their transparency, if the political systems of the home countries of many key sovereign funds limit domestic pressure for more transparency and if sovereign funds get big fast, the world will soon have a new transparency deficit …
Conversely, if Singapore starts disclosing the same kind of information as Norway, it would be a lot easier to begin to assess how sovereign portfolios impact a range of markets. Tony Tan of the GIC suggests that change is afoot:
""We have already decided that the circumstances have changed. The right thing to do is to move to a path of more disclosure.
Let’s see what Singapore proposes, and whether the Gulf follows suit.
“Mr Tan insisted GIC was interested only in a financial return, and revealed the fund had recently rejected an offer from UBS to nominate a board director. “I think we want to be seen to be quite clear that we are not seeking control,” he said. Along with funds from Abu Dhabi and Norway, GIC is helping co-ordinate an effort by the International Monetary Fund to agree common standards for sovereign wealth funds.Mr Tan said concerns in Europe and the United States were “understandable” and should be addressed. However, he said guidelines should be flexible, voluntary, and recognise that not all funds were the same.”
What’s wrong with this? Why does the United States think that it can run a deficit of such a size, and then demand to know where the dollars are being invested? It’s called hubris, and it’s what the rest of the world detests about the US.
not to put too fine a point on it, but countries that are intervening massively to maintain misaligned currencies are themselves contributing the us deficit. a lot of sovereign funds, among other purposes, help to disguise the scale of government intervention in the currency market. the us deficit, in my judgment, isn’t simply a byproduct of us policy choices.
hubris right now is not just found in the united states. 2008 is not 2002, or 2003.
p.s. the strongest argument is that the us traditionally opposed insisting on more transparency from hedge funds backed when they worried emerging market governments (now many hedge funds work for emerging market governments … )/ had a big impact on capital flows to and from the emerging world and thus has little ground to demand transparency from swfs now that they shape flows in and out of the us.
bsetser: If the forecasts from banks like Merill Lynch are to be believed, sovereign funds may soon be adding $1 trillion a year to their assets. At that pace, to paraphrase a Ken Rogoff quip, sovereign funds quickly will become the global financial system
Hardly. Total market capitalization on NYSE is about $20 trillion. London/Tokyo/NASDAQ each have market caps of about $4 trillion each. That’s just equities. If you look at the world bond markets and bank deposits, SWF’s become a major component, but they aren’t going to be the global financial system by any means.
Also, I really doubt that SWF’s can add $1 trillion/year indefinitely. Something will break first.
bsetser: The UK could insist that sovereign funds looking to set up shop in London meet a high standards for disclosure.
Not realistically. The problem is that unless one can come up with a reason why SWF’s are somehow “different” than all of the other funds out there doing business in a way that requires greater disclosure, all of the other non-SWF’s are going to bail.
The other problem is the term “set up shop” and “do business.” Many funds are headquartered in an offshore location like the Cayman Islands, and use London and New York only as places to trade. If they offer securities to US/UK residents, they are subject to disclosure laws and tax requirements, but if someone A wants B to sell $1 million in Treasuries, they aren’t going to have to go through too much paperwork.
$1 trillion would be consistent with a world where SWFs account for the majority of emerging market claims on the us and europe. with home bias, a lot of the market cap of big exchanges will remain owned by their own residents. but swfs will account for a big share of the cross border flow.
that said, i agree with your point on $1 trillion — it is unlikely to materialize on a sustained basis. the question is what will break the trend.
The risk in the deficit has not been in the burden of servicing the deficit itself externally, but in the knock on effect it has had in stretching the risk limits of the US financial system internally. The risk in the required capital inflows has not been in the potential for interruption, but in the deepening of flows from CBs in treasuries to SWFs in equities.
RE: UK transparency – not gonna happen. To begin with, banker types were drawn in by the relative murkiness of the UK system vis-a-vis other financial centers from the Eurodollar era onwards. There are good reasons why London is considered as an offshore financial center in its own right. If the source of the City of London’s comparative advantage is London (financial) fog, it’s not going to disappear anytime soon regardless of what the PM says.
http://www.straitstimes.com/Latest+News/Singapore/STIStory_199323.html
The exercise will lead to more transparency on the part of the Government of Singapore Investment Corporation (GIC), said Mr Lee who chairs the GIC.
Speaking to the Singapore media on Tuesday to wrap up his week-long trip to Saudi Arabia, Mr Lee said that whether the exercise ‘would work and make the Chinese and others also be as open, that’s another question.’
‘But we’re prepared to go this far – we will not disclose how much we invest in each particular sector because that’s sensitive financial information…’
‘But we’re prepared to say this is what we’re doing in this sector and that sector, and so on.’
Asked if GIC will become more transparent as a result, he said: ‘Yes, but we’re not going to disclose just how much year by year we make or we lose because that’s none of their business. What they want to know is are we manipulating the market.’
No offence to anyone here, but I think our MM Lee (yes Im a Singaporean) is correct though rather blunt. Its like when a corporation approaches a bank for loans or funds, the bank is not duly obliged to disclose their source,costs and allocation of funds!
i think the gic — which manages singaporean funds — should feel a bit more of an obligation to singaporeans to explain how good a job it did managing their money. it may not be any of the united states business, but it is the business of the residents of singapore.
in practice i don’t quite see how a fund can demonstrate that it is not “manipulating” or perhaps influencing markets without also disclosing some data on its size and the composition of its portfolio. for example, the currency composition of china’s fx reserves and the size of those reserves (especially the growth) is central to assessing whether china has acted to stabilize the market (by buying more $ when the $ is under stress) or been a source of pressure on the market.
china has a sovereign right to invest its reserves where it wants, so long it doesn’t violate the laws of the country it is investing in (remember, china doesn’t allow inflows into its currency from other central banks … ). but it is hard to assess how china is impacting the market without knowing a bit about how it has managed its portfolio.
Hi Brad,
I agree with your point. On one hand, it has, whether direct or indirect, responsibilities to answer to its shareholders, public or private, yet on the other hand as a business entity, it needs to realise its own goals and targets. It would be unfair to apply a one size fits all regulation or making a sweeping statement against all.
On the point of disclosure, being transparent does not equate to full disclosure of the intricacies of trading strategies and/or portfoilio management techniques.
Besides, manipulative can be a rather subjective and highly debatable term.
And i forgot to add, being a Singaporean, I am happy with the way things are going. Looking back 20-30 years and comparing with the current state of things in Singapore, I think the GIC and Temasek are doing a good job.
bsetser: “i think the gic — which manages singaporean funds — should feel a bit more of an obligation to singaporeans to explain how good a job it did managing their money. it may not be any of the united states business, but it is the business of the residents of singapore.”
Fair enough. But does the US Federal Reserve meet this standard of transparency, say in its discount window operations? Surely the American public have a right to know who has pledged what collateral for public loans?
Why should SWF be so transparent if Hedge Funds are not? Or other similar vehicles? Complaining about SWF’s “transparency” is just another example of US bitching about having lost control of world finance. Those who have the money set the rules. The US doesn’t have the money any longer so it cannot set the rules however much it wants to and whines about it.
Hallo
1. I think we should make a difference.
a. countries, that have only local politic ambitions, because they are small (exampel: Singapore, Norway, Switzerland, ..)
b. countries, that have global politic ambitions, because they are big in certain ways (exampel: US, China, India, (EU), Russia; ..)
2. Transparency is good per se.
So the SWF’s should show their holdings and and books.
3. Transparency for SWF’s, organised by huge centers of power-accumulation (1.b), should have additional rules.
Because: the world has an interest to see, what political (hidden) targets they have.
4. That was the “should-be”.
5. In reality: there exists a hefty ‘fighting’ between the market centers: New York, London; Frankfurt, Hongkong, .. and there will be for sure a global center in Shanghai.
6. Now each gov. will protect and support its own market center.
And -in the case of London- that means: if it is an advantage (and maybe a condition sine qua non), not to have hard transparency rules, in order to attract business, then London will only change the rules, if it get something from the others.
(7. At Davos the politicians have talked about the SWFs. It seems, they think, that there are problems.)
globumedes
Quote of the Day from Economist Steven Roach:
http://www.telegraph.co.uk/money/main.jhtml;jsessionid=KMKID3DNESTTBQFIQMGSFFWAVCBQWIV0?xml=/money/2008/01/28/ccusecon128.xml
With SWFs in the spotlight, debate has raged this week over whether they ought to be more transparent, and to issue a voluntary code of conduct about their investment plans, but Roach said: “Why are we singling out sovereign wealth funds? Why shouldn’t we ask the same of hedge funds, private equity or any other group of investors?
“Is it because these funds are coming from the Middle East, from China – areas that make us uncomfortable. Is this not thinly-veiled financial protectionism?”
Most of the whining about China comes from the USA and it really at bottom America’s chagrin and anger at slipping economically and politically in the world while China is rising so spectacularly. Behind most complaints about China there is little more than sheer envy and fear. Fear at America’s loss of control and dominance.
A system that is becoming more and more competitive (and fair) for all countries is most worrisome for any guy high up on the hog.
John Connolly, if I recall correctly, was the guy back in the early 1970s who famously said to the world “it’s our currency but YOUR problem.” Now the world, or at least China, can say back in our face, “it’s your currency and YOUR problem.” Things have come full circle.
Guest — sorry, but no. China is the one importing inflation from the weak dollar. China is the one who will take large losses on its dollar holdings when the RMB eventually appreciates. China’s policy is creating problems for the US — distortions in trade flows and bond market pricing are the most obvious — but China is the one who will absorb the big financial costs.
And to call the current system “fair” ignores the trade advantage that anyone who produces in China (including US and European MNCs) derive from China’s de facto subsidy, one which has grown truly enormously large.
Shifts in relative power are part of the issue, but the fact that that shift has been associated with unprecedented intervention in the foreign exchange market and a rise in foreign government ownership in a country that historically has opposed all government ownership clearly add to the tensions.
Those who equate concerns about exchange rate intervention and the resulting accumulation of assets in state hands with simple nativism are I think making a mistake. Show me a globalization theorist five years ago who expected $1 trillion plus in emerging market reserve growth?
DC — somehow I think Steve Roach’s quote would appeal to you. I find the gap between Roach’s view of the US gov (does nothing right) and China’s government (does next to nothing wrong — tho his argument back in 04/05 not to worry about China’s internal imbalances b/c China’s top leadership was on the case and they have a track record of achieving their goals doesn’t look so good now) rather amusing.
And I certainly don’t accept his view that the US savings deficit is independent of Chinese policy.
Americans should really stop worrying. The China PBoC already officially stated to then visiting US Treasury Secretary Hank Paulson that the Chinese government would NOT be making strategic acquisitions of any major US Corporations. What else do you want the Chinese government to tell you? Most of foreign investment by the China CIC will follow Chinese trade flow patterns which increasingly involve other developing nations in Southeast Asia, Africa, the Middle East, and Latin America. Americans are really paranoid if they think that their local McDonald’s restaurant will be turned into a Panda Express takeout joint, Coke Cola will be mixed with Chinese Green tea, or Disneyworld will somehow transformed into Bejingland.
Could you explain how current account deficits (US) are a function of current account surpluses (Chinese FX policy), but not vice versa?
Let’s see — maybe the CIC should say the same thing publicly, and indicate that it also will not be providing financial support to Chinese SOEs looking to expand abroad. I would like to see the CIC adopt a governance structure that puts it at arms length from the government, invest only in index funds, and leave management of the state banks and support of SOEs investing abroad to an entirely different agency. That isn’t going to happen tho ..
Globumedes — I like your distinction between SWFs from city states (often strategically dependent on the uS for protection) and SWFs from global power centers … China’s fund is going to be different from other funds. Russia’s too. They also will be viewed differently. So, for that matter, would be a US SWF that invested abroad, particularly in say Latin America …
Hi Brad,
Analogous to the television show, “Deal or No Deal”, I have an interesting proposition for you. Since we know Wall Street Hedge Funds are also less than transparent, in exchange for full public disclosure by the China CIC of asset holdings, how about full disclosure from the Wall Street Hedge Funds involved in the currency attacks that precipitated the 1997 Asian financial crisis. The trio of Hedge Funds include Soros’ Quantum Fund, James Robertson’s Jaguar and Tiger funds and Moore Capital Management, as well as, according to reports, the Connecticut-based LTCM hedge fund of John Merriweather. It is a well established fact that these Hedge Funds enjoyed a close personal relationship to high level members of the former Clinton Administration. It is estimated that the Hedge Fund trio reaped an estimated $10 billion in profit from the illegal manipulation of currency markets. Both former President Bill Clinton and former Treasury Secretary Robert Rubin would be required to testify under oath either their knowledge of, or tacit approval of the illegal currency scams.
http://www.financialsense.com/editorials/engdahl/2008/0123.html
The 1997 Asia financial crisis and the ensuing Russian state debt default of August 1998 created a sea-change in global capital flows to the advantage of the dollar. With Korea, Thailand, Indonesia and most emerging markets in flames following a coordinated, politically-motivated attack by a trio of US hedge funds, led by Soros’ Quantum Fund, James Robertson’s Jaguar and Tiger funds and Moore Capital Management, as well as, according to reports, the Connecticut-based LTCM hedge fund of John Merriweather.
The impact of the Asia crisis on the dollar was notable and suspiciously positive. Andrew Crockett, the General Manager of the Bank for International Settlements, the Basle-based organization of the world’s leading central banks, noted that while the East Asian countries had run a combined current account deficit of $33 billion in 1996, as speculative hot money flowed in, “1998-1999, the current account swung to a surplus of $87 billion.” By 2002 it had reached the impressive sum of $200 billion. Most of that surplus returned to the US in the form of Asian central bank purchases of US Treasury debt, in effect financing Washington policies, pushing US interest rates way down and fuelling an emerging New Economy, the NASDAQ dot.com New Economy IT boom.
The Clinton Administration was dedicated to advancing the interests of American world financial domination in a nation whose national economic base was largely destroyed in the years following 1971.
DC — I might be inclined to take your views on hedge fund transparency a bit more seriously if they were not combined with wild conspiracy theorizing. Given your views about the Rubin Treasury, I don’t see why you spend so much time on a blog maintained by someone who proudly worked there, and who learned his economics then.
bsetser: “..China is the one who will absorb the big financial costs.”
Brad, I love your work but I don’t get your saving the poor Chinese from themselves angle. If the government is losing a percentage on their investments in exchange for providing employment it is a wash to the Chinese people.
Also sounds condescending and disingenuous. When was the idealology of doing it for the good of the people last used? Operation Iraqi Liberation. Ask an Iraqi how that worked out.
Your thoughts that the Gulf funds should be appreciating their currencies, and dispersing their wealth to the masses, make sense.
But the situation is not the same in China, I am not convinced it is really in their interest to appreciate. Perhaps that idea will become sharpened here to a point where it will also be convincing to the Chinese.
“China is the one who will absorb the big financial costs.” I would say that China doesn’t seem to mind, since if it did, it could take steps to reduce its dollar accumulation but it does not. Since Chinese are very intelligent I have to assume either that they do not expect “big financial costs” or else think they are worth paying for some other good. And if the US really wanted to stop the flood of dollars going out it could impose tariffs. The fact that it does not indicates to me that it would prefer the present situation than one that would result from tariffs. So I still see the US as simply whining about the reality in which it finds itself and for which it has no solution.
“I would like to see the CIC adopt a governance structure that puts it at arms length from the government, invest only in index funds, and leave management of the state banks and support of SOEs investing abroad to an entirely different agency.”
And we’d all like a free pony every month, but those nasty Chinese won’t give us one.
bsetser: in practice i don’t quite see how a fund can demonstrate that it is not “manipulating” or perhaps influencing markets without also disclosing some data on its size and the composition of its portfolio.
It’s easy for a fund to manipulate the market. Trouble is that it is very hard to do so without either attracting attention or shooting yourself in the end. Fund takes small company and pushes the price up. Easy. Now how do you make money off of this? Relatively hard. There are some ways of doing it involving “pump and dump” or “insider information” but there are established rules against that that more or less work, and in the case of “pump and dump” you can’t do this sort of thing quietly.
bsetser: Let’s see — maybe the CIC should say the same thing publicly, and indicate that it also will not be providing financial support to Chinese SOEs looking to expand abroad.
Or just don’t do it. Personally, I don’t think that it would be a good idea for CIC to fund SOE’s overseas expansion, but I really don’t see the point in saying that it won’t.
bsetser: I would like to see the CIC adopt a governance structure that puts it at arms length from the government
Done.
bsetser: invest only in index funds
Which index? Small cap? Large cap? Emerging markets?
bsetser: and leave management of the state banks and support of SOEs investing abroad to an entirely different agency.
Management of the state banks is done by the management team of those banks and those are separate from the shareholders. Support of SOE’s investing abroad is done by the China Export Import Bank.
This doesn’t resolve the problem. Since the Chinese government could very well say “we won’t use CIC for SOE investment support” but here is $100 billion to the China Exim bank.
well, the nasty chinese do give us a “Free pony” of sorts when they subsidize the consumption of their goods; the scale of that subsidy is now meaningful relative to US GDP. But, like other subsidies, it ends up distorting the composition of us output. ag subsidies, which are smaller, generate a lot more political heat. I am one of the few who doesn’t think this subsidy is a net good for the us.
2fish — any index fund. doesn’t matter much.
agree that China could always hand $100b over to exim or a state bank (aBC?) if it wanted to … it doesn’t solve the problem, as you note. but it helps i think to have clearer distinctions between different functions.
incidentally, the CIC almost certainly will be supporting cHinese SOEs expanding abroad. See China railways.
bsetser: agree that China could always hand $100b over to exim or a state bank (aBC?) if it wanted to … it doesn’t solve the problem, as you note. but it helps i think to have clearer distinctions between different functions.
The point I was making was that if China wanted to simply pump money into foreign expansion, there would be no reason for it to create the Chinese Investment Corporation or deal with Wall Street at all. The fact that the Chinese government has started CIC and is courting Wall Street means that its just not trying to do what a lot of people are worried about it doing.
You don’t need Wall Street investment bankers if you want to issue a $2 billion line of credit at 2% interest to Angola (which is what the Exim Bank has done.)
bsetser: incidentally, the CIC almost certainly will be supporting cHinese SOEs expanding abroad. See China railways.
China Railways is I think an example of how CIC *isn’t* supporting SOE’s expanding abroad. The money that China Railways Group got from the IPO is going to be used for domestic railway construction and China Railways has no plans that I know of for major foreign expansion.
If an SOE wants $600 million to build a railroad in Africa, it’s not going to go to CIC. It will go to the Exim bank.
Apparently, we don’t want to increase financial transparency:
http://news.bbc.co.uk/1/hi/business/7216883.stm