Comment on “Are Asian Sovereign Wealth Funds Different?”

Abstract

While Truman (2011) builds on the author's extensive past work on Sovereign Wealth Funds (SWFs), it is his first paper to focus specifically on Asian funds. Mr Truman is exceptionally well positioned to analyze and comment on various policy issues and challenges surrounding SWFs from the point of view of a recipient country. Mr Truman is particularly well known among SWF experts for his proprietary “Scoreboard for Sovereign Wealth Funds,” which he first presented in the autumn of 2007 (Truman, 2007) and in which he made the first attempt to rank various state investment entities based on the four criteria of structure, governance, transparency/accountability, and behavior. The author subsequently extended and updated this analytical framework, culminating in 2010 in his seminal book entitled “Sovereign Wealth Funds: Threat or Salvation?” (Truman, 2010). Mr Truman's approach to the increasing influence and growing relative importance of SWFs has been indicative of the views and concerns among US policymakers during the last several years. His “scoreboard” approach was a material influence on the US Treasury and – by extension – the International Monetary Fund, which worked hard in 2007 and 2008 to engage with various sovereign investors around the world to come up with a clear and constructive definition of a “sovereign wealth fund” and to agree on a set of generally acceptable principles and practices. The resulting “Santiago Principles” and the establishment of the International Forum of Sovereign Wealth Funds was the result of these efforts. While in the past, some aspects of Mr Truman's work elicited disagreement and objections from parts of the SWF community, his insights and arguments have been extremely valuable to anyone who sought to understand the motivations and concerns of the policymaking community in the USA, arguably the most important recipient country for sovereign capital flows. By focusing on Asia–Pacific, Truman (2011) brings this analytical approach to bear on an area of particular importance to the USA in terms of both trade and financial flows and geopolitics. The author poses the question of whether Asia is different, and proceeds to apply – in a methodical and systematic way – his proprietary analytical framework to the region. Upon reading the paper, one gets a solid grasp of where Asian funds stand, individually and collectively, in the broader context of policy issues surrounding the SWF phenomenon. Mr Truman observes that Asia's funds are large in size, and as such attract their fair share of public attention and scrutiny. He also correctly identifies the different source of funding for some of the larger Asian SWFs, namely, monetary reserves. However, the author chooses to highlight only one particular aspect of this key difference: the sometimes controversial nature of macroeconomic policies resulting in accumulation of excess foreign exchange reserves. There are at least two other important differentiating factors arising from this feature that make Asia unique. First, it often gives rise to institutional tensions within the public sector, as allocating a portion of excess monetary reserves to a newly established SWF often leads to increased competition with the central bank, suggesting extra care must be taken with respect to institutional design and governance. Second, in contrast to commodity export-based and other types of fiscal reserves, SWF assets carved out from monetary reserves do not constitute net government savings as they are effectively funded with local currency denominated, interest bearing debt. In Truman (2010), the author questions whether this difference in a fund's liability profile is economically meaningful, suggesting that it should not matter beyond simple “accounting niceties.”Truman (2011) reaffirms this view. However, irrespective of which part of the broader government – the central bank or the ministry of finance – has issued the local liabilities in question, they are effectively owed to nongovernment domestic economic agents, typically local commercial banks. The latter in turn fund these assets by taking deposits from local private households and the corporate sector. Ironically, the author references Park (2008) when discussing potential mismanagement of SWF assets and the dangers that would pose to the home country's entire financial system but fails to concur with the central point of that paper, which focused precisely on the unique liability profiles of monetary reserve-funded Asian SWFs and the resulting macroeconomic and financial linkages. Consequently, senior policymakers and portfolio managers responsible for these funds may have additional considerations and complications when constructing and managing investment portfolios. This may also limit the degrees of freedom a sovereign owner has with respect to deploying and using these assets for policy purposes.