The launch of the Santiago Principles should effectively clear away negative impressions and confusion over sovereign wealth funds.
Wang Shuilin, Caijing 14 April 2009
Sovereign wealth funds have been around for decades and, with reforms in the global economy, they have played an increasingly important role in the international financial system over the past 10 years.
Market observers estimate SWFs manage between US$2 trillion and US$3 trillion worth of assets – more than the world’s hedge funds combined. As a matter of fact, SWFs manage assets equal to as much as one-third of the combined foreign exchange reserves held by all the world’s governments.
A fundamental issue that cannot be neglected is the link between SWFs and the domestic policies of individual nations, according to a forthcoming essay prepared by the International Monetary Fund. Each SWF is tied to a domestic policy agenda in its homeland, whether that’s Singapore, China, Abu Dhabi or Kuwait.
SWFs can, for example, be used by countries exporting non-renewable resources to overcome challenges that arise in the search for stable, sustainable sources of wealth and counteract price fluctuations as well as commodity shortages.
Some SWFs have specifically set goals to encourage economic growth. That is, they want to establish efficient and diverse economies that decrease the impact of fluctuating commodities prices, and adapt their economies to a “post-commodity” era.
China’s central bank – the People’s Bank of China – has come under balance-sheet pressure due to increasing levels of forex reserves. Concerns hinge on the costs of holding forex currencies and mismatched currencies. Thus, China decided to set up an SWF called China Investment Corp. initially to support domestic policies by managing forex reserves prudently and effectively.
SWFs can help the market by efficiently allocating capital to current and fiscal accounts of various countries, thus bolstering market liquidity. That’s also the case when the financial sector faces challenges.
A big chunk of the capital raised by different banks (during the financial crisis) has come from SWFs. As long-term investors and stable sources of liquidity, an SWF can provide a cushion for a market, or at least ease the negative affects of short-term market fluctuations.
The IMF and an international team of SWF representatives that contributed to the IMF study found that, as of June 2008, the assets of SWFs had grown rapidly in recent years, while their investment scale had spread across many sectors. Researchers found investments made by SWFs promoted economic growth, prosperity and development in their home countries. Countries that accepted SWF investments also benefited substantially.
Misunderstandings and Concerns
Although SWFs have had a positive impact, and will continue to do so, their growth and active cross-border allocations of assets have led to a series of challenges.
In countries that accept investments, some worry the non-commercial operations of SWFs may affect national security. Areas of national security and economic security have increased in many countries over the past 10 years, directly affecting investment environments. An increasing number of cases are under review by the Committee on Foreign Investment in the United States (CFIUS) for example, although this is happening outside the United States as well.
These concerns are groundless based on the long-term, operational style of SWFs. But they have increased the risk of trade protectionism, which negatively affects all concerned parties and can reduce SWF investments while increasing SWF risks.
From a global perspective, these concerns prevent global capital from flowing efficiently and undermine the stability and normal operations of the international financial and monetary system.
Toward a Unified System
Representatives from the IMF and all SWFs held a conference in November 2007 to exchange views on important issues regarding SWFs, countries that accept their investments, and international financial markets. This conference proved to be a catalyst for SWF interactions with international institutions and governments.
A follow-up in late April 2008 was the setting up of the International Working Group of Sovereign Wealth Funds (IWG) which included 26 member-countries with SWFs. Then, after many discussions, all IWG members contributed to a Generally Accepted Principles and Practices (GAPP) document known as the Santiago Principles, which reflects investment practices and objectives of SWFs.
Published last October, this important document addresses the nature, objectives, governance, investments and risk management of SWFs. The Santiago Principles were produced based on widely accepted international principles and practices in related fields, and call on SWF governance to be based on economic and financial principles.
Key Legislation
The Santiago Principles aim to support a sound legal framework to ensure that SWFs develop governance, risk management and effective operations, as well as comply with macroeconomic policy frameworks under the guidance of policies, objectives and goals. Since SWFs are economically and financially oriented, this consensus will play a role in stabilizing the global financial system, decreasing protectionist pressures, and maintaining an open and stable investment environment.
Although the Santiago Principles are voluntary, IWG members and nearly all SWF countries either implemented or intend to implement them. Now, these principles need attention not only through multilateral negotiations among SWFs, but also by means of support from the governments in their home countries.
The Santiago Principles aim to clear up several major concerns about SWFs, including investment policies, institutional ethics, transparency and consistency of rules and regulations in countries that accept investments.
With regard to investment policy, the Santiago Principles should be purely based on economic and financial considerations. In governance, all SWFs have agreed on a world-class institutional code of ethics that addresses public disclosure, risk management, corporate governance and internal controls.
In terms of transparency, the Santiago Principles call on all SWFs to maintain legal frameworks for openness, investment policy, funding sources, divestment policies, and related financial disclosure. In addition, the Santiago Principles require all SWFs to comply with all applicable regulations in countries that accept investments.
The Santiago Principles are extremely important for the future development SWFs. Their creation grew from open and meaningful discussions among all members, and their launch effectively clears up many suspicions and negative impressions surrounding SWFs.
The Santiago Principles point out that SWFs do not undermine national security or national economic security, but rather comply with laws in the countries that accept investments and realize risk-adjusted financial returns. An SWF can play an active role in the multi-faceted investment environment.
But transparency and equal treatment must go both ways. While SWFs secure transparency and openness, countries that accept investments should provide equal guarantees. For example, some members of the Organisation for Economic Co-operation and Development have indicated that they would deal with SWFs from an equal and non-discriminatory standpoint.
What is worth noting is that China and CIC were actively involved in the development of the Santiago Principles and are committed to their implementation. Through the IWG channel, CIC will continue to promote cooperation and dialogue among all parties, including countries that import capital and accept investments, and other SWFs.
Wang Shuilin is the public affairs supervisor of China Investment Corp. and a member of the team that drafted the Santiago Principles.
1 comment:
Understanding Sovereign Wealth Funds
The launch of the Santiago Principles should effectively clear away negative impressions and confusion over sovereign wealth funds.
Wang Shuilin, Caijing
14 April 2009
Sovereign wealth funds have been around for decades and, with reforms in the global economy, they have played an increasingly important role in the international financial system over the past 10 years.
Market observers estimate SWFs manage between US$2 trillion and US$3 trillion worth of assets – more than the world’s hedge funds combined. As a matter of fact, SWFs manage assets equal to as much as one-third of the combined foreign exchange reserves held by all the world’s governments.
A fundamental issue that cannot be neglected is the link between SWFs and the domestic policies of individual nations, according to a forthcoming essay prepared by the International Monetary Fund. Each SWF is tied to a domestic policy agenda in its homeland, whether that’s Singapore, China, Abu Dhabi or Kuwait.
SWFs can, for example, be used by countries exporting non-renewable resources to overcome challenges that arise in the search for stable, sustainable sources of wealth and counteract price fluctuations as well as commodity shortages.
Some SWFs have specifically set goals to encourage economic growth. That is, they want to establish efficient and diverse economies that decrease the impact of fluctuating commodities prices, and adapt their economies to a “post-commodity” era.
China’s central bank – the People’s Bank of China – has come under balance-sheet pressure due to increasing levels of forex reserves. Concerns hinge on the costs of holding forex currencies and mismatched currencies. Thus, China decided to set up an SWF called China Investment Corp. initially to support domestic policies by managing forex reserves prudently and effectively.
SWFs can help the market by efficiently allocating capital to current and fiscal accounts of various countries, thus bolstering market liquidity. That’s also the case when the financial sector faces challenges.
A big chunk of the capital raised by different banks (during the financial crisis) has come from SWFs. As long-term investors and stable sources of liquidity, an SWF can provide a cushion for a market, or at least ease the negative affects of short-term market fluctuations.
The IMF and an international team of SWF representatives that contributed to the IMF study found that, as of June 2008, the assets of SWFs had grown rapidly in recent years, while their investment scale had spread across many sectors. Researchers found investments made by SWFs promoted economic growth, prosperity and development in their home countries. Countries that accepted SWF investments also benefited substantially.
Misunderstandings and Concerns
Although SWFs have had a positive impact, and will continue to do so, their growth and active cross-border allocations of assets have led to a series of challenges.
In countries that accept investments, some worry the non-commercial operations of SWFs may affect national security. Areas of national security and economic security have increased in many countries over the past 10 years, directly affecting investment environments. An increasing number of cases are under review by the Committee on Foreign Investment in the United States (CFIUS) for example, although this is happening outside the United States as well.
These concerns are groundless based on the long-term, operational style of SWFs. But they have increased the risk of trade protectionism, which negatively affects all concerned parties and can reduce SWF investments while increasing SWF risks.
From a global perspective, these concerns prevent global capital from flowing efficiently and undermine the stability and normal operations of the international financial and monetary system.
Toward a Unified System
Representatives from the IMF and all SWFs held a conference in November 2007 to exchange views on important issues regarding SWFs, countries that accept their investments, and international financial markets. This conference proved to be a catalyst for SWF interactions with international institutions and governments.
A follow-up in late April 2008 was the setting up of the International Working Group of Sovereign Wealth Funds (IWG) which included 26 member-countries with SWFs. Then, after many discussions, all IWG members contributed to a Generally Accepted Principles and Practices (GAPP) document known as the Santiago Principles, which reflects investment practices and objectives of SWFs.
Published last October, this important document addresses the nature, objectives, governance, investments and risk management of SWFs. The Santiago Principles were produced based on widely accepted international principles and practices in related fields, and call on SWF governance to be based on economic and financial principles.
Key Legislation
The Santiago Principles aim to support a sound legal framework to ensure that SWFs develop governance, risk management and effective operations, as well as comply with macroeconomic policy frameworks under the guidance of policies, objectives and goals. Since SWFs are economically and financially oriented, this consensus will play a role in stabilizing the global financial system, decreasing protectionist pressures, and maintaining an open and stable investment environment.
Although the Santiago Principles are voluntary, IWG members and nearly all SWF countries either implemented or intend to implement them. Now, these principles need attention not only through multilateral negotiations among SWFs, but also by means of support from the governments in their home countries.
The Santiago Principles aim to clear up several major concerns about SWFs, including investment policies, institutional ethics, transparency and consistency of rules and regulations in countries that accept investments.
With regard to investment policy, the Santiago Principles should be purely based on economic and financial considerations. In governance, all SWFs have agreed on a world-class institutional code of ethics that addresses public disclosure, risk management, corporate governance and internal controls.
In terms of transparency, the Santiago Principles call on all SWFs to maintain legal frameworks for openness, investment policy, funding sources, divestment policies, and related financial disclosure. In addition, the Santiago Principles require all SWFs to comply with all applicable regulations in countries that accept investments.
The Santiago Principles are extremely important for the future development SWFs. Their creation grew from open and meaningful discussions among all members, and their launch effectively clears up many suspicions and negative impressions surrounding SWFs.
The Santiago Principles point out that SWFs do not undermine national security or national economic security, but rather comply with laws in the countries that accept investments and realize risk-adjusted financial returns. An SWF can play an active role in the multi-faceted investment environment.
But transparency and equal treatment must go both ways. While SWFs secure transparency and openness, countries that accept investments should provide equal guarantees. For example, some members of the Organisation for Economic Co-operation and Development have indicated that they would deal with SWFs from an equal and non-discriminatory standpoint.
What is worth noting is that China and CIC were actively involved in the development of the Santiago Principles and are committed to their implementation. Through the IWG channel, CIC will continue to promote cooperation and dialogue among all parties, including countries that import capital and accept investments, and other SWFs.
Wang Shuilin is the public affairs supervisor of China Investment Corp. and a member of the team that drafted the Santiago Principles.
Post a Comment