중앙데일리

Why the fuss over sovereign wealth funds?

Movements of such funds can unbalance a country’s economy.

Dec 18,2007
A Nov. 19 meeting of the G7 club of industrialized nations in Washington produced a fierce dispute among those who were present. The G7 consists of the finance ministers of the United States, Japan, Germany, France, Italy, Canada and the United Kingdom.
Also present at the meeting were finance ministers from eight non-G7 countries as well ― Korea, China, Russia, Kuwait, Norway, Saudi Arabia, Singapore and the United Arab Emirates.
What was the fuss about?
It was tension about so-called sovereign wealth funds, or substantial negotiable assets controlled by governments. The eight guest nations, due to huge earnings from natural resources such as oil, and exports, are among the richest holders of such funds.
Why are advanced economies taking precautions against sovereign wealth funds? Mainly because of their enormous size and power. The monumental volume of sovereign wealth funds means their investment decisions can cause gigantic fluctuations in the stock market or economy of any country these funds enter or leave.
Advanced economies are also very sensitive to the possibility that sovereign wealth funds could be manipulated for political objectives. For example, such a fund could carry the threat of a hostile merger and acquisition of a key industry in another country to gain leverage in resolving diplomatic and security issues.
At the November meeting United States Treasury Secretary Henry Paulson advocated placing restrictions on sovereign wealth funds, saying that their “investments ... could threaten the security of the countries that serve as investment recipients.”
But finance ministers from countries that operate such funds said that treating them differently from private funds is a form of discrimination.
Understanding sovereign wealth funds requires knowledge of foreign exchange reserves. Foreign exchange reserves are a kind of emergency fund that a country holds in foreign currencies, for use in difficult times.
In broad terms, a sovereign wealth fund is a fund owned by a nation or state composed of financial assets such as bonds, stocks, property or other financial investments. Its purpose is to accumulate more wealth.
Korea experienced a currency crisis in 1997 largely because the country had a shortage of foreign exchange reserves. As foreign lenders recalled loans they made to Korean financial companies, foreign exchange reserves that totaled $22.4 billion in 1997 shrank to $3.9 billion on Dec. 18 that year. Thanks to aid from the International Monetary Fund, Korea was able to avoid bankruptcy.
What is happening now?
Having undergone the hardship of the 1997 crisis, the Bank of Korea dramatically increased the volume of the country’s foreign exchange reserves. An immense influx of dollars from brisk exports also contributed to growing currency reserves.
Revived exports of mobile phones and automobiles have helped Korea post an account surplus every year since 1998. Today, Korea’s foreign exchange reserves total $261.9 billion, the sixth largest in the world.
The situation is similar for neighboring Asian countries that are big exporters.
The United States, which has enjoyed a vigorous economy since 2002, has expanded its imports despite a massive current account deficit (its imports hugely exceed its exports ― in other words, it consumes more than it produces). Thanks to this, Asian exporters, including China, Japan, Taiwan and Korea, have stockpiled enormous dollar reserves.
Oil-producing countries have also amassed huge stockpiles of foreign reserves. Since 2004, international oil prices have skyrocketed, which has helped countries that export that natural resource to become flooded with dollars.
However, huge dollar reserves have caused other problems. Countries with large foreign reserves have been investing in assets that can be immediately converted into safe cash, such as U.S. Treasury bonds, so that the countries that own them can quickly mobilize emergency capital whenever needed.
The problem with this is that although U.S. Treasury bonds are safe, their profit ratio is very low (3-4 percent based on 10 year maturity).
Putting foreign currency reserves in low-yielding U.S. bonds produces lower returns than investing in higher-yielding assets, such as stocks or real estate. Foreign currency reserves amounting to hundreds of billions of dollars produce enormous returns if their profit margin advances a mere 1 percentage point.
The weakening dollar means foreign reserves held in U.S. Treasury bonds lose value by just sitting there. In search of higher returns, countries began investing a portion of their reserves in higher-yielding assets, including real estate, stocks and bonds. This was the beginning of sovereign wealth funds.
Singapore created the first such fund, Temasek, in 1974. When Temasek unveiled its investment results in 2004 for the first time, its annual returns were 19 percent.
These funds are heavily invested in Korea. Temasek is the biggest shareholder in Hana Financial Group. Another Singaporean fund, the Government of Singapore Investment Corporation, owns the Finance Center in southern Seoul, formerly known as Star Tower. The building boasts the largest gross floor area in Korea.
Prompted by Singapore’s success, sovereign wealth funds have become a major trend recently. China, which has the world’s largest foreign currency reserves, launched a fund of its own in September of this year. The China Investment Corporation has assets of $200 billion. Japan is turning over the idea of founding a $700 billion fund, and Libya, an oil-rich country, has formed the Libyan Investment Corporation, which has $40 billion.
Globally, these funds control assets worth $2 trillion to $3 trillion, and the scale is expanding. The holdings are bigger than the value of all the hedge funds in the world, $1.5 trillion, and the combined value of the world’s private equity funds, $700 billion.
The United States, in particular, is casting a dubious eye on China, which claims the only purpose of its fund is to expand its investments.
China now keeps over half of its foreign currency reserves in U.S. Treasury bonds. The money that flows into the United States is reinvested in China via U.S. financial institutions. Through this, the U.S. profits 20 percent to 30 percent annually. Therefore, China’s move to create a sovereign wealth fund takes U.S. earnings from Treasury bonds.



By Yoon Chang-hee JoongAng Ilbo [spring@joongang.co.kr]



dictionary dictionary | 프린트 메일로보내기 내블로그에 저장