Capital pools reflect global power shift

Capital pools reflect global power shift

Mar 26, 2007 04:30 AM
David Crane
Global Issues

What do you do if you are sitting on more than $1.3 trillion but making very little money on it because interest rates are so low?

This is what China had in its foreign exchange reserves at the end of last year and the amount today is even higher, as its trade surpluses continue to accumulate. China has been investing much of this money in low-interest U.S. government debt, but has decided it should do better.

So earlier this month China's finance minister, Jin Renqing, announced that a new state agency would be established to make more profitable investments. It could be allocated more than $200 billion just to get it started.

China's central bank governor, Zhou Xiaochuan, subsequently declared that China's foreign exchange reserves were high enough and that China did not intend to accumulate additional reserves, which had been increasing by about $20 billion a month.

The funds could be used to finance "strategic" investments in energy and other natural resources around the world. Money could also be used to help China's budding multinationals make foreign investments, including takeovers.

Some of it could end up in Canadian resource projects. And Canadian banks could end up earning big fees by helping to arrange mining investments around the world.

The Chinese initiative, though, is just one example of how vast pools of capital are accumulating, much of it in the developing world.

One model pointed to by the Chinese is Temasek Holdings, a Singapore government corporation established in 1974 that manages various state assets for the Singapore government. It acts as a strategic investor by taking significant positions in local and foreign corporations. Its investments exceed $100 billion and it is focusing on investments across Asia in the automotive, financial services, telecommunications, bioscience, energy and high-tech industries.

Then there is the Government of Singapore Investment Corp., which manages more than $100 billion in foreign exchange reserves, investing in bonds, equities, real estate and other investments.

With the increase in oil prices, the oil exporting nations are also accumulating huge reserves. The New York Federal Reserve estimates about half the $1.1 trillion in oil revenues among oil exporting countries last year could end up in financial assets such as bonds and equities, with half the roughly $570 billion being invested by central banks and the other half by national investment authorities.

States like Dubai, Qatar and Kuwait have massive funds, which invest in real estate, bonds, equities and other projects. Last year, Dubai's state investment company created a furor in the United States when it appeared it might end up managing some of the largest U.S. ports in an acquisition and was forced to back off.

Norway since 1996 has been investing revenues from its vast oil and gas wealth into a special fund, initially the Government Petroleum Fund and now known as the Government Pension Fund—Global. It has assets of about $335 billion, which it invests mainly in equities and bonds and is under the direction of the Norwegian central bank.

It had about $3 billion invested in the Canadian stock market at the end of last year. Its biggest investment was in the Bank of Montreal, and its other top investments included Canadian Imperial Bank of Commerce, Barrick Gold, Nortel Networks, Potash Corp., Research in Motion, Rogers Communications and EnCana Corp. Altogether it held shares in 99 Canadian businesses.

Canada has its own public investment funds. The largest is the Caisse de depot et placement du Quebec, which since 1965 has managed public pension funds. At the end of last year it had $208 billion in its own assets. It invests in bonds and shares, commodities and private equity in Canada and other countries.

Then there is the CPP Fund, launched in 1999 to manage funds for the Canada Pension Plan. At the end of 2006 it had $110.8 billion in assets, an amount that is expected to reach $250 billion a decade from now. Like the Caisse de depot, it is a fairly aggressive international investor.

The big change, though, is that a growing portion of the investment funds in the world are going to be managed from China, Russia, India and the Middle East.

This is another sign of the shift in the distribution of power occurring in the global economy – something we will have to get used to.