You should be a little more precise. Both of the two forms of short I mentioned could use repo. The difference is that there is a bigger mismatch in the case of leverage using a loan (collateralised to minimise cost, hence repo in this case) than using a short in a similar instrument (eg short one stock against another). If what I said about governance is correct, I would expect to see more use of the riskier strategy involving loans by the less transparent SWFs. I would be surprised if Norway do this.

Guest — the CIC’s raison d’etre is to take currency risk and support China’s exchange rate regime. that policy goal trumps any consideration of returns. And I don’t see why the CIC, which already is buying dollars with borrowed RMB, should necessarily go out and borrow more dollars to be able to take bigger positions and potentially make more money.

yes, the CIC might make more — and be able to offset its currency losses — by borrowing more and investing more. but is also might lose more. the CIC’s portfolio shouldn’t be driven by a need to offset exchange rate losses associated with China’s exchange rate regime. that is a recipe for taking large risks — too large a set of risks in my book.

as importantly, China’s external portfolio is already large, and large enough to influence other countries markets. making that portfolio even bigger would only add to the associated concerns.

I agree tho the i-banks have no real incentive to criticize the governments with big SWFs. you see a bit of this in the gulf — where they don’t necessarily issue a lot of hard hitting research on the region’s economic troubles. Why highlight inflationary monetary policies if that might mean losing money?

I have a lot of doubt that CIC will be leveraged. If it leveraged then it strikes me as a profoundly stupid thing to do since there is already defacto highly leveraged with 1) the treasury bonds that the Chinese government has issued to pay for CIC and 2) the liabilities that the holdings of CIC (primarily financials) already have. With the high degree of leverage CIC already has, it should be really conservative in its strategies, and if it tries to have leverage on top of what it already has, then it’s this huge house of cards that is going to fall down at the worst possible time.

If you have a crisis then CIC is going to need cash at the very moment that the Chinese government can’t borrow and the banks that it holds are in trouble.

Guest: if I was a banker, I would want to be as tight as possible with these SWF’s as they may be a capital lifeline at some point in the near term. Questions would come sparingly.

The job of a banker is to ask tough questions and to refuse to do business with a client if you don’t get good answers. It’s kind of silly not to ask tough questions in hopes of getting a future capital lifeline because if a client can’t answer tough questions, then it’s likely that when you are in trouble, they are going to be in trouble.

One point for Rien; if I was a banker, I would want to be as tight as possible with these SWF’s as they may be a capital lifeline at some point in the near term. Questions would come sparingly.

In addition to funds like Mubadala, QIA, Istithmar and DIC, even some of of the classic funds like KIA – and GIC are likely levered up.

Which all seems to explain why external debt of countries like the UAE is on the rise and more Sovereign funds might face some of the challenges that QIA has regarding deals done with the expectation of persistent cheap credit.

any more information on how the GIC gets leverage? CIC shouldn’t follow suit in my view , as it is already leveraged domestically (it is funded by borrowing … ) and well it intrinsically is running huge risks.

Rien — in the past countries running stuctural surpluses typically haven’t also borrowed from abroad to increase their external purchasing power. that strikes me as new. and most SOEs had more of a domestic than an international footprint — so there are significant changes afoot. and I don’t see how external investments that are derived from the pursuit of a protectionist exchange rate policy can be viewed as apolitical … or how they won’t be used in some instances to support multiple objectives.

Brad, you are entirely right when you say that the term SWF stand for an increasingly heterogeneous group of financial institutions. Perhaps we should do away with this term altogether. What matters is that state has a policy of running a structural surplus and uses those funds for investment abroad. What kinds of structures and what kinds of investments (incl leveraged ones) is immaterial, unless the state uses this “wealth” to pursue several additional objectives, i.e. not only to save ( intergenerationally because private households would not do it themselves) , but also, for instance practice currency manipulation and protectionism. Those are matters for trade diplomacy, not markets.