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Better wealth management

By Zhang Monan (China Daily)
Updated: 2010-12-30 07:50

China should diversify foreign reserves, internationalize the yuan and the improve efficiency of sovereign funds

The global financial crisis has offered China a good opportunity to review its ability to manage its increasing national wealth.

During the past three decades China has developed into the world's largest foreign reserves holder and net capital exporter from a country that lacked reserves and foreign investment. The country has changed from being a debtor to become the world's second largest creditor.

This has had a profound influence on China's participation in globalization, but it has also brought into stark relief the country's current dilemma.

China's foreign reserve system has added huge pressure to its issuance of money. The country urgently needs to change its long-established foreign reserves management model and work out a long-term strategy for national wealth management.

By the end of 2009, China's foreign reserves had increased to $2.4 trillion, nearly 30 percent of the $8.1 trillion world total. In comparison, Russia holds nearly 7 percent of global foreign reserves and other emerging economies, such as India and the Republic of Korea each possess nearly 4 percent of the world's total. At present, emerging economies hold more than 50 percent of world's total global foreign reserves.

Compared with the creditor status of many emerging economies, almost all developed countries have become debtors in recent years. By the end of 2009, the total global foreign debt amounted to $56.9 trillion, of which the United States, Japan, the United Kingdom, Germany, France, and other European countries owed the lion's share. The US's foreign debt was 23 percent of the global total. Such an unbalanced global creditor-debtor structure between emerging and developed economies has been largely the result of the West-dominated financial and industrial division of labor.

Almost all kinds of global financial products are issued by the US and denominated by the dollar. The purchases of large volumes of US bonds by emerging economies as part of their official foreign reserves have contributed a great deal to the US' fiscal deficit and its debts financing.

With their net foreign credit rapidly expanding, emerging economies should find more effective investment outlets for their enormous foreign reserves so as to improve their earnings.

The establishment of sovereign wealth funds has become an important platform and strategic option for many countries to manage their foreign reserves assets.

According to the US Sovereign Wealth Fund Institute, the value of the worldwide assets in sovereign wealth funds totaled $3.84 trillion by the end of March, 47 percent of the total global foreign reserves. In some countries, such as the United Arab Emirates, the value of such assets is much larger than that of their nominal foreign reserves.

The fast expansion of sovereign wealth funds complies with the strategy of countries seeking to diversify their foreign assets.

On average, global sovereign wealth funds comprise 25 percent bond assets and 45 percent stock assets. In Singapore, for instance, the stock investment under the government investment corporations represent about 40 percent of the country's foreign assets. In Norway, such investments comprise 60 percent of foreign assets.

According to a Morgan Stanley estimate, the value of global sovereign wealth funds has increased $45 billion to $500 billion year-on-year. By 2014, the value is expected to surpass the scale of official global foreign reserves.

China has made much slower steps in this regard, especially in its stock investments. Currently, China has two main sovereign wealth funds: one with assets of $347.1 billion, managed by the China Investment Corporation, a wholly State-owned company engaging in foreign assets investment, and the National Social Security Fund.

However, China's sovereign wealth funds have long attached excessive importance to mobility and security. For example, the China Investment Corporation has invested 87.4 percent of its funds in cash assets and only 3.2 percent in stocks, in sharp contrast to the global average of 25 percent bond investments and 45 percent stock investments.

As its foreign assets continue to increase, China should review its creditor status and pay more attention to how to ensure the steady growth of its hard-won sovereign wealth. To this end, the country should further advance the internationalization of the yuan and more actively cultivate a homegrown financial market.

At the same time, the country should also try to change its established sovereign wealth management model in a bid to strengthen their management and improve the utilization efficiency of its sovereign wealth.

To expedite this process, China should set up a diversified and multilayer foreign reserves management system and strive to expand the bond and stock investment in its foreign assets.

The author is an economics researcher with the State Information Center.