Asia’s SWFs must shed political shackles

The region’s sovereign wealth funds need stronger investment focus

The Chinese sovereign wealth fund is about to have a new chairman, according to the Beijing rumour mill, to be Hu Huaibang, currently the chairman of Bank of Communications, China’s fifth-largest bank. Whispers in the Chinese capital suggest several other senior figures in financial circles turned down the job after the previous incumbent, Lou Jiwei, departed to become the finance minister.

It is easy to understand why the job is not highly sought after, whether the rumours prove true or not. To be head of China Investment Corp is to be the subject of criticism in the press and social media whenever it looks like an investment has gone wrong. Fear of the downside of mistakes is pervasive.

Inevitably, organisations like CIC are subject to intense politics. Sadly, the politics show no sign of abating for big funds, whether in China, Korea or Japan. But as export earnings come under pressure in all three countries, the need to invest wisely will only grow. All these countries need to cultivate a more professional, less politicised investment culture to support the building of a more robust social safety net.

The goal is not impossible. Despite the political connections at the top of Temasek, the Singaporean government-owned fund is professionally managed today. And while the fund controls many of Singapore’s companies, the relationship with them is still hands off, according to bankers and others familiar with the workings of Singapore Inc.

CIC has tried to be a professional organisation. One senior executive, Jesse Wang, is not even a member of the Communist Party. Its president, Gao Xiqing, who came from the National Social Security Fund, is widely respected. But he is considered too western to have been promoted to the top job, lending substance to those who believe that senior staffers who have been abroad too long face a glass ceiling in China.

Below the top ranks, there is massive turnover, though in many cases CIC has asked people to leave when they proved disappointing. But as an investment entity, it has a long way to go. Its performance has been uneven, especially given the fact that it is judged on the basis of dollar returns, rather than local currency returns. In 2011, it was down 4.3 per cent, while it is expected to show a gain of more than 10 per cent for 2012.

Meanwhile, there are also changes at the top at the Korean National Pension Service, which has about $350bn under management and is one of the largest pools of capital in the world. The widely respected head of NPS is moving to an academic post, making it possible for the new government, led by South Korea’s first female president Park Geun-hye, to install its own choice to run it. That is natural.

But staffers in New York, in place for less than two years, have also been told they should expect to soon rotate back to Seoul. That is unfortunate. They are only just beginning to become valuable to the head office, forming the contacts and the insights that will allow them to make better investment decisions. An assignment in New York seems to be regarded as a sinecure, to be shared among the widest possible group.

NPS reports to the Ministry of Health and Welfare, to people who do not understand finance and investment. The fund is audited by politicians looking for grounds to criticise, and overseen by a board that includes such non-experts as the head of the local restaurant association, one demoralised staffer says.

Moreover, the fund suffers from huge turf battles between the domestic investment side and the cross-border investment department, people who deal with NPS say.

Japan, of course, has never established a sovereign wealth fund at all, while its government pension fund, the world’s biggest, continues to target a mere 1 per cent rate of return (after inflation) on the assets it manages.

Ministry of Finance officials have long opposed such a fund for reasons that strike many analysts as absurd, such as fear of angering the US government, which relies on Japanese support for its Treasury market. But recently the Japanese government has established a fund to invest in troubled companies that banks will not finance in order to keep them out of the claws of so-called vulture funds seeking to profit from restructuring such companies. That is an even more troubling use of taxpayer money.

Today, there is ample liquidity in the region (though not as much in Korea as elsewhere). But the liquidity will not always be there, and the savings of the region’s ageing populations will only diminish. The countries of North Asia have to loosen the political shackles of their wealth funds and get their investment act together sooner rather than later.

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