June 28, 2008
Industry players hold differing views over what form such rules should take
By Grace Ng
WHILE controversy rages on about SWFs, the one thing that virtually everyone agrees on is the need to clarify the rules of the game.
But that is where the common ground ends.
One camp is clamouring for all funds to follow rules to be laid down by the ostensibly independent International Monetary Fund (IMF).
The other camp, largely the SWFs, wants to throw out the rulebook - especially if they do not get a say in crafting the rules on controversial issues such as transparency. They are gunning for a voluntary set of principles.
Most SWFs are quick to acknowledge that there are benefits to common standards that reassure the public of their investment behaviour - the way hedge funds and private equity players had done earlier.
This would be 'the smart move', noted Mr Peter Mandelson, the European Union's trade commissioner, in a recent commentary in The Wall Street Journal.
So, 'a voluntary and limited code of conduct would only formalise what (SWFs) already do...and confound any suspicions' that the funds have political motives.
'Any fund unwilling to sign up to a reasonable code would have trouble explaining why,' he reasoned.
However, SWFs maintain that any international financial guidelines must be formed with the participation of everyone, as Chinese Foreign Minister Yang Jiechi told the media on the sidelines of the annual full session of China's Parliament in March.
Two months later, the IMF set up an International Working Group with 23 member countries, to draft SWF principles. Participants include Norway, China, Russia, Kuwait, Timor-Leste and Singapore.
The group will be meeting on July 18 and 19 in Singapore to discuss the code, slated to be ready by October.
Nonetheless, 'work between the funds and the IMF on such a code has got off to a prickly start', as some funds are 'suspicious of the IMF's motives', admitted Mr Mandelson.
He was careful to stress that 'the IMF is not, and will never be allowed to become, some sort of second International Criminal Court'.
Path of limited disclosure
BUT proactively, some SWFs have already volunteered to follow some rules to avoid the risk of being shut out of markets.
The 'right thing to do is to move to a path of more disclosure', GIC deputy chairman Tony Tan told the media in Davos in January. If issues like disclosure are not addressed directly, the greatest danger is that recipients may raise barriers to hinder the flow of funds, he said.
Singapore's Temasek Holdings and Abu Dhabi have both signed an agreement acceding to some investment principles on March 20, after talks with the United States. These include greater disclosure and ensuring that investments are for economic, not political, purposes.
But GIC, unlike Temasek, is not likely to publish its returns annually and give details of its every move.
Minister Mentor Lee Kuan Yew, who is also GIC's chairman, outlined reasons why the fund should not be too transparent in a Bloomberg TV interview on April 29.
'If you make your moves very clear, people can predict what you will do next, and forestall you or pre-empt you,' he said.
Furthermore, being too transparent may raise people's expectations of the Government to spend GIC's returns. So GIC discloses its profits and losses only over a five-year or 10-year period, said Mr Lee.
Limited disclosure may well be the path the IMF will take in crafting governing principles for SWFs.
Mr Mohsin Khan, IMF regional director for the Middle East and Central Asia, thinks that the code will not go as far as to require that SWFs reveal their investment strategies.
'(That) doesn't seem to be a very sensible business decision...If they reveal their investment strategy, anything they want to buy will become more expensive and anything they want to sell will become cheaper,' he told Bloomberg in Dubai last month.
'To reveal what kinds of assets they're holding, fixed income versus equities versus real assets, that will probably be where we'll wind up.'
Other SWFs are not fully in favour of regulations but are willing to fall in with the rest.
Russia's Ministry of Finance, which manages the National Wealth Fund, is keen to demonstrate that it will march in step with other SWFs. It announced that it will publicly and regularly report on government investing and spending of the fund's capital.
As for the China Investment Corporation's (CIC) armoury, it has committed to no oil, no jets and no guns. CIC has pledged that it will not buy into overseas airlines, telecommunications, oil companies or military companies. Nor will it buy a controlling stake in any company or use its investments to exert influence or steal technology.
But that does not mean CIC will toe the IMF line on SWF legislation. CIC chairman Gao Xiqing has insisted that it should be unnecessary for the IMF to draft guidelines for SWFs.
'That law will only hurt feelings. It's not economic. It doesn't make sense. Politically, it's stupid,' he said in an e-mail quoted by the CBS television network's 60 Minutes. 'If you make... someone singled out as a bad boy, then that becomes a problem emotionally.'
Mr Angel Gurria, secretary-general of the Organisation for Economic Cooperation and Development, appears to agree with Mr Gao.
He told the media last month, after meeting senior Beijing officials: 'We believe that there should not be any legislation or any regulation or any code applied that unduly restricts the freedom of investment, because we would be doing ourselves a disservice.'
Professionalising SWFs
YET others feel that the way forward is not to regulate funds, but to improve the way they are run.
This is the view of Mr Knut Kjaer, former chief executive of Norges Bank Investment Management, Norway's SWF. He wants to shape the SWF debate around how to encourage SWFs to be professionally managed.
'Particular regulations for SWFs would be a step in the wrong direction...The end game is not a universal model,' he argued in a Financial Times column in April.
Given the 'huge variety in purpose' as well as cultural and political considerations for SWFs, there will be different ways to build successful funds, he pointed out.
So the discussion should centre on 'what conditions are needed for the professional management of publicly owned financial assets'.
As the debate about rules of engagement for SWFs rages on, it is easy to forget why SWFs even need to define these rules. The question to ask about SWFs really is: More rules and greater transparency to what end?
�NUS professor Ho Yew Kee argued that it should ultimately be about maintaining efficient markets.
'SWFs are massive funds which may have undue power and thus, there is a need to 'regulate' them to ensure that they do not disrupt any market activities.� Therefore if transparency is framed from that perspective, there is no problem whatsoever,' he said.
Indeed, some rules of engagement that maintain an open financial playing field for all SWFs are what they need to manage and grow their huge war chests for decades to come.
Industry players hold differing views over what form such rules should take
By Grace Ng
WHILE controversy rages on about SWFs, the one thing that virtually everyone agrees on is the need to clarify the rules of the game.
But that is where the common ground ends.
One camp is clamouring for all funds to follow rules to be laid down by the ostensibly independent International Monetary Fund (IMF).
The other camp, largely the SWFs, wants to throw out the rulebook - especially if they do not get a say in crafting the rules on controversial issues such as transparency. They are gunning for a voluntary set of principles.
Most SWFs are quick to acknowledge that there are benefits to common standards that reassure the public of their investment behaviour - the way hedge funds and private equity players had done earlier.
This would be 'the smart move', noted Mr Peter Mandelson, the European Union's trade commissioner, in a recent commentary in The Wall Street Journal.
So, 'a voluntary and limited code of conduct would only formalise what (SWFs) already do...and confound any suspicions' that the funds have political motives.
'Any fund unwilling to sign up to a reasonable code would have trouble explaining why,' he reasoned.
However, SWFs maintain that any international financial guidelines must be formed with the participation of everyone, as Chinese Foreign Minister Yang Jiechi told the media on the sidelines of the annual full session of China's Parliament in March.
Two months later, the IMF set up an International Working Group with 23 member countries, to draft SWF principles. Participants include Norway, China, Russia, Kuwait, Timor-Leste and Singapore.
The group will be meeting on July 18 and 19 in Singapore to discuss the code, slated to be ready by October.
Nonetheless, 'work between the funds and the IMF on such a code has got off to a prickly start', as some funds are 'suspicious of the IMF's motives', admitted Mr Mandelson.
He was careful to stress that 'the IMF is not, and will never be allowed to become, some sort of second International Criminal Court'.
Path of limited disclosure
BUT proactively, some SWFs have already volunteered to follow some rules to avoid the risk of being shut out of markets.
The 'right thing to do is to move to a path of more disclosure', GIC deputy chairman Tony Tan told the media in Davos in January. If issues like disclosure are not addressed directly, the greatest danger is that recipients may raise barriers to hinder the flow of funds, he said.
Singapore's Temasek Holdings and Abu Dhabi have both signed an agreement acceding to some investment principles on March 20, after talks with the United States. These include greater disclosure and ensuring that investments are for economic, not political, purposes.
But GIC, unlike Temasek, is not likely to publish its returns annually and give details of its every move.
Minister Mentor Lee Kuan Yew, who is also GIC's chairman, outlined reasons why the fund should not be too transparent in a Bloomberg TV interview on April 29.
'If you make your moves very clear, people can predict what you will do next, and forestall you or pre-empt you,' he said.
Furthermore, being too transparent may raise people's expectations of the Government to spend GIC's returns. So GIC discloses its profits and losses only over a five-year or 10-year period, said Mr Lee.
Limited disclosure may well be the path the IMF will take in crafting governing principles for SWFs.
Mr Mohsin Khan, IMF regional director for the Middle East and Central Asia, thinks that the code will not go as far as to require that SWFs reveal their investment strategies.
'(That) doesn't seem to be a very sensible business decision...If they reveal their investment strategy, anything they want to buy will become more expensive and anything they want to sell will become cheaper,' he told Bloomberg in Dubai last month.
'To reveal what kinds of assets they're holding, fixed income versus equities versus real assets, that will probably be where we'll wind up.'
Other SWFs are not fully in favour of regulations but are willing to fall in with the rest.
Russia's Ministry of Finance, which manages the National Wealth Fund, is keen to demonstrate that it will march in step with other SWFs. It announced that it will publicly and regularly report on government investing and spending of the fund's capital.
As for the China Investment Corporation's (CIC) armoury, it has committed to no oil, no jets and no guns. CIC has pledged that it will not buy into overseas airlines, telecommunications, oil companies or military companies. Nor will it buy a controlling stake in any company or use its investments to exert influence or steal technology.
But that does not mean CIC will toe the IMF line on SWF legislation. CIC chairman Gao Xiqing has insisted that it should be unnecessary for the IMF to draft guidelines for SWFs.
'That law will only hurt feelings. It's not economic. It doesn't make sense. Politically, it's stupid,' he said in an e-mail quoted by the CBS television network's 60 Minutes. 'If you make... someone singled out as a bad boy, then that becomes a problem emotionally.'
Mr Angel Gurria, secretary-general of the Organisation for Economic Cooperation and Development, appears to agree with Mr Gao.
He told the media last month, after meeting senior Beijing officials: 'We believe that there should not be any legislation or any regulation or any code applied that unduly restricts the freedom of investment, because we would be doing ourselves a disservice.'
Professionalising SWFs
YET others feel that the way forward is not to regulate funds, but to improve the way they are run.
This is the view of Mr Knut Kjaer, former chief executive of Norges Bank Investment Management, Norway's SWF. He wants to shape the SWF debate around how to encourage SWFs to be professionally managed.
'Particular regulations for SWFs would be a step in the wrong direction...The end game is not a universal model,' he argued in a Financial Times column in April.
Given the 'huge variety in purpose' as well as cultural and political considerations for SWFs, there will be different ways to build successful funds, he pointed out.
So the discussion should centre on 'what conditions are needed for the professional management of publicly owned financial assets'.
As the debate about rules of engagement for SWFs rages on, it is easy to forget why SWFs even need to define these rules. The question to ask about SWFs really is: More rules and greater transparency to what end?
�NUS professor Ho Yew Kee argued that it should ultimately be about maintaining efficient markets.
'SWFs are massive funds which may have undue power and thus, there is a need to 'regulate' them to ensure that they do not disrupt any market activities.� Therefore if transparency is framed from that perspective, there is no problem whatsoever,' he said.
Indeed, some rules of engagement that maintain an open financial playing field for all SWFs are what they need to manage and grow their huge war chests for decades to come.
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